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When a corporation has both common stock and preferred stock outstanding: A) dividends on preferred stock are paid only if the company has current...

1. When a corporation has both common stock and preferred stock outstanding:
A) dividends on preferred stock are paid only if the company has current earnings.
B) dividends on preferred stock must be paid before dividends on common stock can be paid.
C) preferred stockholders receive the same dividend per share as common stockholders.
D) dividends on preferred stock are paid only if dividends are to be paid on the common stock.

2. For the fiscal year ended March 31, 2004, a company reported earnings per share of $3.25 and cash dividends per share of $0.50. During fiscal 2005, the company had a 3 for 2 stock split. In the annual report for the fiscal year ended March 31, 2005, earnings per share and cash dividends for fiscal 2004 would be reported, respectively, as:
A) $3.25 and $0.50
B) $4.85 and $0.75
C) $2.17 and $0.33
D) $1.09 and $0.17

3. If the selling price per unit were to drop $2, from $100 to $98, the sales volume were to increase 500 units to 4,500 units per month, and advertising expense were to increase by $1,000:
A) the break-even point would increase.
B) the break-even point would decrease.
C) the contribution margin ratio would increase.
D) operating income would decrease.

4. An accounts receivable results from the sale of:
A) Property, plant and equipment for cash
B) Goods and services to customers on account
C) Goods and services to customers for cash.
D) The firm's common stock.
E) None of the above

5. A cash equivalent is a current asset that:
A) Will be converted to cash within one year.
B) Will be converted to cash within one month.
C) Is readily convertible into cash with a minimal risk.
D) Is readily convertible into cash with a substantial risk.
E) None of the above.

6. The difference between total receipts and total payments referred to as
A) cumulative cash flow.
B) beginning cash flow.
C) net cash flow.
D) cash balance.

7. The difference between the amount of cash on the firm's books and the amount credited to it by the bank is
A) an overdraft.
B) interest revenue.
C) extended disbursement.
D) float.

8. Probably the safest and most marketable instrument for short-term investment is
A) commercial paper.
B) large denomination certificates.
C) Treasury notes.
D) Treasury bills.

9. Eurodollar certificates of deposits
A) are not marketable investments.
B) are U.S. dollars held on deposit by foreign banks and loaned out by those banks to anyone seeking dollars.
C) pay interest rates usually lower than the rates on U.S. treasury bills.
D) are European currencies deposited into international U.S. branch banks.

10. Cash flow does not rely on which of the following?
A) the payment patterns of customers
B) the monetary policy of the Federal Reserve
C) the speed at which suppliers and creditors process checks
D) the efficiency of the banking system

11. Inventory is usually divided into three basic categories except
A) projected sales.
B) work in progress.
C) finished goods.
D) raw materials.

12. Mr. Jones borrows $2,000 for 90 days and pays $35 interest. What is his effective rate of interest?
A) 9.3%
B) 7.0%
C) 11.7%
D) None of the above

13. Which of the following costs are included in the cost classification that is based on the relationship between total cost and volume of activity?
A) Variable cost and fixed cost.
B) Direct cost and indirect cost.
C) Product cost and period cost.
D) Committed cost and discretionary cost.

14. Accounts receivable may be used as a source of financing by
A) pledging the receivables as loan collateral.
B) factoring the receivables to a finance company.
C) selling securities backed by the receivables.
D) all of the above

15. A dollar today is worth more than a dollar to be received in the future because
A) risk of nonpayment in the future.
B) the dollar can be invested today and earn interest.
C) inflation will reduce purchasing power of a future dollar.
D) None of the above.

16. If you were to put $1,000 in the bank at 6% interest each year for the next ten years, which table would you use to find the ending balance in your account?
A) Present value of $1
B) Future value of $1
C) Present value of an annuity of $1
D) Future value of an annuity of $1

17. You are to receive $12,000 at the end of 5 years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today?
A) Present value of an annuity of $1
B) Future value of an annuity
C) Present value of $1
D) Future value of $1

18. An annuity may be defined as
A) a payment at a fixed interest rate.
B) a series of payments of unequal amount.
C) a series of yearly payments.
D) a series of consecutive payments of equal amounts.

19. Lou Lewis borrows $10,000 to be repaid over 10 years at 9 percent. Repayment of principal in the first year is:
A) $1,558
B) $658
C) $742
D) $885

20. Mr. Nailor invests $5,000 in a certificate of deposit at his local bank. He receives annual interest of 8% for 7 years. How much interest will his investment earn during this time period?
A) $2,915
B) $3,570
C) $6,254
D) $8,570

21. Mr. Fish wants to build a house in 10 years. He estimates that the total cost will be $170,000. If he can put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount needed?
A) Between 11% and 12%
B) Between 8% and 9%
C) 17%
D) None of the above

22. Which of the following is not one of the components that makes up the required rate of return on a bond?
A) risk premium
B) real rate of return
C) inflation premium
D) maturity payment

23. A 14-year zero-coupon bond was issued with a $1000 par value to yield 12%. What is the approximate market value of the bond?
A) $597
B) $205
C) $275
D) $482

24. The market allocates capital to companies based on
A) risk.
B) efficiency.
C) expected returns.
D) all of the above

25. Which of the following is the last budgeted financial statement to be prepared?
A) Budgeted income statement.
B) Budgeted balance sheet.
C) Cash budget.
D) It doesn't matter which one is prepared last.

Problem (15 points)

State Street Corp. will pay a dividend on common stock of $4.80 per share at the end of the year. The required return on common stock (Ke) is 13.2%. The firm has a constant growth rate of 7.2%. Compute the current price of the stock (Po).

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