Question 1

Company ABC needs external capital to finance a new product line. Its operating leverage is high, and its revolving credit agreement contains a ratings trigger. What will Company ABC MOST LIKELY do to finance its new product line?

Options :

A : Issue convertible debentures

B : Issue long-term notes.

C : Issue common stock.

D : Use retained earnings.

Answer: C

Question 2

If a company has $126 million in debt at an average cost of 7% and $234 million in equity at a cost of 11%, what is its weighted average cost of capital, assuming a marginal tax rate of 35% and a risk-adjusted rate of 13%?

Options :

A : 8.7%

B : 9.6%

C : 10.0%

D : 10.9%

Answer: A

Question 3

A pizza restaurant chain maintains separate accounts at bank branches near each of their

1,067 restaurants to handle the deposit of cash received. Early each morning, the

company’s point-of-sale system electronically transmits collection totals from the previous

day to its main computer. ACH debits are then initiated to concentrate the funds from the

local accounts to the concentration account the following day. Recently, several of the ACH

debits have been returned for insufficient funds because deposits weren’t being taken to

the bank on a timely basis by the local employees. Without increasing staff at the

restaurants, what could Treasury do to prevent this from happening and avoid overdrafts at

the local banks?

Options :

A : Negotiate better float schedules at its local banks.

B : Install smart safes at each restaurant location.

C : Use a courier to deposit to each bank 3 times per week

D : Use wire transfers to concentrate the cash instead of ACH.

Answer: B

Question 4

Measurement of a company's liquidity includes the calculation of all of the following EXCEPT:

Options :

A : current ratio.

B : cash turnover.

C : return on equity.

D : quick ratio

Answer: C

Question 5

The stock of a manufacturing company is priced so that its expected rate of return is below its required rate, as calculated by the Capital Asset Pricing Model (CAPM). Which of the following will occur in an efficient capital market?

Options :

A : Buying pressure for the firm’s stock will drive the price up.

B : Buying pressure for the firm’s stock will drive the price down.

C : Selling pressure for the firm’s stock will drive the price up.

D : Selling pressure for the firm’s stock will drive the price down.

Answer: D