QUESTION 1: Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets of $350,000. The debt-to-total-assets ratio was 17%, the interest rate on the debt was 7.5%, and the firm's tax rate was 35%. The new CFO wants to see how the ROE would have been affected if the firm had used a 50% debt ratio. Assume that sales, operating costs, total assets, and the tax rate would not be affected, but the interest rate would rise to 8.0%. By how much would the ROE change in response to the change in the capital structure?

• 3.79%
• 3.69%
• 3.18%
• 3.53%
• 2.48%

QUESTION 2: Your girlfriend just won the Florida lottery. She has the choice of $16,600,000 today or a 20-year annuity of $1,050,000, with the first payment coming one year from today. What rate of return is built into the annuity?

• 2.75%
• 2.73%
• 2.52%
• 2.35%
• 2.54%

QUESTION 3: Last year Kruse Corp had $355,000 of assets, $403,000 of sales, $28,250 of net income, and a debt-to-total-assets ratio of 39%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $252,500. Sales, costs, and net income would not be affected, and the firm would maintain the same debt ratio (but with less total debt). By how much would the reduction in assets improve the ROE?

• 5.67%
• 5.30%
• 4.40%
• 4.18%
• 5.98%

QUESTION 4: Last year Jandik Corp. had $365,000 of assets, $18,750 of net income, and a debt-to-total-assets ratio of 37%. Now suppose the new CFO convinces the president to increase the debt ratio to 48%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE?

• 1.41%
• 2.09%
• 1.97%
• 1.72%
• 1.35%

QUESTION 5: Your father paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years, then an additional lump sum payment of $13,500 at the end of the 5th year. What is the expected rate of return on this investment?

• 12.91%
• 10.46%
• 11.49%
• 15.23%
• 12.39%

QUESTION 6: Branch Corp.'s total assets at the end of last year were $315,000 and its net income after taxes was $22,750. What was its return on total assets?

• 7.22%
• 7.58%
• 7.96%
• 8.36%
• 8.78%

QUESTION 7: You have a chance to buy an annuity that pays $2,350 at the beginning of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

• $6,688.85
• $7,090.18
• $7,825.96
• $6,822.63
• $6,956.41

QUESTION 8: You inherited an oil well that will pay you $30,000 per year for 25 years, with the first payment being made today. If you think a fair return on the well is 7.5%, how much should you ask for it if you decide to sell it?

• $269,616.75
• $294,780.98
• $348,704.33
• $359,489.00
• $399,032.79

QUESTION 9: Last year Rennie Industries had sales of $240,000, assets of $175,000, a profit margin of 5.3%, and an equity multiplier of 1.2. The CFO believes that the company could reduce its assets by $51,000 without affecting either sales or costs. Had it reduced its assets by this amount, and had the debt ratio, sales, and costs remained constant, how much would the ROE have changed?

• 3.55%
• 3.19%
• 3.66%
• 3.01%
• 3.59%

QUESTION 10: Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $300,000, operating costs to be $265,000, assets to be $200,000, and its tax rate to be 35%. Under Plan A it would use 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but under a contract with existing bondholders the TIE ratio would have to be maintained at or above 4.5. Under Plan B, the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating costs, assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure?

• 2.72%
• 2.59%
• 2.96%
• 3.22%
• 3.14%

QUESTION 11: Last year Ann Arbor Corp had $160,000 of assets, $305,000 of sales, $20,000 of net income, and a debt-to-total-assets ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000. Assets, sales, and the debt ratio would not be affected. By how much would the cost reduction improve the ROE?

• 13.00%
• 14.17%
• 11.31%
• 10.14%
• 15.73%

QUESTION 12: Han Corp's sales last year were $395,000, and its year-end receivables were $52,500. The firm sells on terms that call for customers to pay 30 days after the purchase, but some delay payment beyond Day 30. On average, how many days late do customers pay? Base your answer on this equation: DSO - Allowed credit period = Average days late, and use a 365-day year when calculating the DSO.

• 15.92
• 15.18
• 13.88
• 18.51
• 14.07

QUESTION 13: What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $2,500?

• $162.50
• $164.13
• $123.50
• $185.25
• $128.38

QUESTION 14: Tucker Electronic System's current balance sheet shows total common equity of $3,125,000. The company has 125,000 shares of stock outstanding, and they sell at a price of $52.50 per share. By how much do the firm's market and book values per share differ?

• $27.50
• $28.88
• $30.32
• $31.83
• $33.43

QUESTION 15: Wells Water Systems recently reported $8,250 of sales, $4,500 of operating costs other than depreciation, and $950 of depreciation. The company had no amortization charges, it had $3,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating working capital. How much free cash flow did Wells generate?

• $1,770.00
• $1,858.50
• $1,951.43
• $2,049.00
• $2,151.45

QUESTION 16: Your aunt has $760,000 invested at 5.5%, and she now wants to retire. She wants to withdraw $45,000 at the beginning of each year, beginning immediately. She also wants to have $50,000 left to give you when she ceases to withdraw funds from the account. For how many years can she make the $45,000 withdrawals and still have $50,000 left in the end?

• 41.13
• 39.50
• 38.56
• 39.10
• 45.61

QUESTION 17: Tibbs Inc. had the following data for the year ending 12/31/07: Net income = $300; Net operating profit after taxes (NOPAT) = $400; Total assets = $2,500; Short-term investments = $200; Stockholders' equity = $1,800; Total debt = $700; and Total operating capital = $2,300. What was its return on invested capital (ROIC)?

• 14.91%
• 15.70%
• 16.52%
• 17.39%
• 18.26%

QUESTION 18: Garcia Industries has sales of $167,500 and accounts receivable of $18,500, and it gives its customers 25 days to pay. The industry average DSO is 27 days, based on a 365-day 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 freed-up by this change, how would that affect its net income, assuming other things are held constant?

• $508.32
• $405.68
• $488.77
• $386.13
• $518.09

QUESTION 19: A new firm is developing its business plan. It will require $635,000 of assets, and it projects $450,000 of sales and $355,000 of operating costs for the first year. Management is reasonably sure of these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt. What is the maximum debt ratio the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.)

• 50.87%
• 59.34%
• 49.87%
• 62.34%
• 42.89%

QUESTION 20: Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm's total-debt-to-total-assets ratio was 60.0%. Based on the DuPont equation, what was the ROE?

• 22.61%
• 17.86%
• 19.00%
• 23.18%
• 23.56%