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3. Fairplay had the following information related to the sale of its products during 2006,
which was its first year of business:
Revenue $1,000,000
Returns of goods sold $ 100,000
Cash collected $ 800,000
Cost of goods sold $ 700,000
Under the accruals basis of accounting, how much net revenue would be reported on
Fairplay’s 2006 income statement?
A. $200,000.
B. $800,000.
C. $900,000.
D. $1,000,000
4. During 2007, Accent Toys Plc., which began business in October of that year, purchased
10,000 units of its most popular toy at a cost of $10 per unit in October. In anticipation of
heavy December sales, Accent purchased 5,000 additional units in November at a cost of
$11 per unit. During 2007, Accent sold 12,000 units at a price of $15 per unit. Under the
First In, First
Out (FIFO) method, what is Accent’s cost of goods sold for 2007?
A. $105,000.
B. $115,000.
C. $120,000
D. $122,000.
5. At the beginning of 2007, Glass Manufacturing purchased a new machine for its assembly
line at a cost of $600,000. The machine has an estimated useful life of 10 years and
estimated residual value of $50,000. Under the straight-line method, how much
depreciation would Glass take in 2008 for financial reporting purposes?
A. None.
B. $55,000.
C. $60,000.
D. $70,000
6. For 2007, Flamingo Products had net income of $1,000,000. At 1 January 2007, there
were 1,000,000 shares outstanding. On 1 July 2007, the company issued 100,000 new
shares for $20 per share. The company paid $200,000 in dividends to common
shareholders. What is Flamingo’s basic earnings per share for 2007?
A. $0.73
B. $0.91
C. $0.95
D. $0.97
7. Equity equals
A. Assets – Liabilities.
B. Liabilities – Assets.
C. Assets + Liabilities.
D. Non of the above
10. Money received from customers for products to be delivered in the future is recorded as
A. revenue and an assets.
B. an asset and a liability.
C. revenue and a liability.
D. Non of the above
11. An investor concerned whether a company can meet its near-term obligations is most
likely to calculate the
A. current ratio.
B. debt-to-equity ratio.
C. return on total capital.
D. Price-earnings ratio
12. Like many technology companies, Techno Tools operates in an environment of declining
prices. Its reported profits will tend to be highest if it accounts for inventory using the
A. FIFO method.
B. LIFO method.
C. FILO method
D. weighted average cost method.
13. Compared to using the weighted average cost method to account for inventory, during a
period in which prices are generally rising, the current ratio of a company using the FIFO
method would most likely be
A. lower.
B. higher.
C. average
D. dependent upon the interaction with account payable.
14. Compared to a company that uses the FIFO inventory accounting method, during periods
of rising prices a company that uses the LIFO method will most likely appear
A. more liquid.
B. less profitable
C. more profitable.
D. more efficient
15. Which of the following ratios is NOT part of the original DuPont system?
A. Asset turnover.
B. Equity multiplier.
C. Debt to total capital.
D. Net profit margin
19. Which of the following ratios would NOT be used to evaluate how efficiently
management is utilizing the firm’s assets?
A. Equity turnover
B. Fixed asset turnover.
C. Payables turnover.
D. Gross profit margin
20. Which of the following ratios would be used to evaluate the liquidity of a company?
A. Cash ratio
B. Current ratio
C. Quick ratio
D. All of the above
29. Which of the following is not a method of consolidation into group financial statements?
A. Acquisition method
B. Merger method
C. Merger and acquisition method
D. All of the above
30. Financial statement analysis can be done using the following methods:
A. Common size statement analysis
B. Horizontal analysis
C. Cash flow analysis
D. All of the above
5. The quoted price of a corporate bond is 90 ½. The par value is RM5,000. The dollar price
is closest to:
A. RM4,500
B. RM4,525
C. RM4,750
D. RM4,800
8. The present value of a 3-year, RM1,000 par value bond with a coupon rate of 5 percent
that pays interest annually assuming a discount rate of 3 percent is closest to:
A. RM943.43
B. RM1,056.57
C. RM1,182.91
D. RM1,256.43
9. If the discount rate remains constant as a bond approaches maturity, the price of a
premium bond most likely will:
A. Increase
B. Decrease
C. Remain constant
D. Insufficient data provided
10. The present value of a RM1,000 par value, zero-coupon bond with a three-year maturity
assuming an annual discount rate of 6 percent compounded semiannually is closest to:
A. RM937.48
B. RM916.62
C. RM857.40
D. RM837.48
11. A bond with 14 years to maturity and a coupon rate of 6.375 percent has a yield-to-
maturity (YTM) of 4.5 percent. Assuming the bond’s YTM remains constant, the bond’s
value as it approaches maturity will most likely:
A. Increase
B. Decrease
C. Remain constant
D. Insufficient data provided
12. If the discount rate for each of the bonds remains at 6.5 percent for 10 years, the passage
of time will result in a decrease in value for:
A. Bond 1 only
B. Bond 2 only
C. Both of the bonds
D. None of the bonds
14. All else equal, which of the following 10-year coupon bonds has the most price volatility?
The bond with a coupon rate of:
A. 5.0%
B. 6.0%
C. 7.0%
D. 8.0%
15. What will happen to interest rate risk for an option-free bond if market yields decrease?
A. Interest rate risk will decrease
B. Interest rate risk will increase
C. Interest rate risk remains the same
D. Insufficient data provided
16. All else being equal, which of the following has the greatest volatility?
A. 20-year, 15% coupon.
B. 5-year, 10% coupon.
C. 10-year, 10% coupon
D. 20-year, 10% coupon.
19. The liquidity preference theory of the term structure of interest rates implies that the
shape of the yield curve should be:
A. upward-sloping.
B. downward-sloping
C. variable.
D. flat or humped.
20. Which of the following situations lead to short-term profit opportunities in the bond
market?
A. Inflation is expected to rise.
B. Interest rates become more volatile.
C. Yields of all maturities start to rise.
D. Yields of all maturities remains flat
21. Which of the following contains the overall rights of the bondholders?
A. Covenant
B. Rights offering
C. Trustee
D. Indenture
22. If the market rate of interest is greater than the coupon rate, the bond will be valued:
A. At par
B. Greater than par
C. Less than par
D. Uncertain
24. Which of the following statements regarding a sinking fund provision is most accurate?
A. It requires that the issuer retire a portion of the principal through a series of
principal payments over the life of the bond.
B. It requires that the issuer set aside money based on a predefined schedule to
accumulate the cash to retire the bonds at maturity.
C. It permits the issuer to retire more than the stipulated sinking fund amount if they
choose.
D. It allows the issuer the flexibility of setting aside any amount that they choose to.
25. Which of the following bond price calculations is correct? An investor would pay:
A. $956.25 for a $1,000 corporate bond quoted at 95 20/32.
B. $941.00 for a $1,000 Treasury bond quoted at 94 10/32.
C. $966.43 for a $10,000 Treasury bond quoted at 96 27/32.
D. $975.23 for a $10,000 bond quoted at 97 15/32
26. Which of the following is the shape of an inverted yield curve or term structure?
A. Flat
B. Upward sloping
C. Downward sloping
D. Up and downward sloping
27. Which of the following statements regarding accrued interest on a bond is most accurate?
A. If the buyer must pay the seller the accrued interest, the bond is said to be trading
ex-coupon.
B. The bond is trading flat if the bond issuer is in default and the bond is trading
without accrued interest.
C. The bond is trading cum coupon if the bond issuer is in default and the bond is
trading without accrued interest.
D. The accrued interest is paid by the seller of the bond to the buyer (new owner) of
the bond.
29. An investor holds a 20-year, semi-annual 8.00% coupon Treasury bond issued at par.
Market interest rates are currently at 6.50%. The bond is noncallable. A coupon payment
is due this week. Which of the following choices best represents the type of risk the
investor faces?
A. Reinvestment risk
B. Prepayment risk
C. Credit risk
D. Default risk
30. The annual payment of a 20-year, semi-annual pay bond with a RM5,000 par value and a
6.875% coupon rate currently trading at 89.28 is closest to:
A. RM171.88.
B. RM244.25.
C. RM153.45.
D. RM343.75
31. While working abroad, John purchases a foreign bond with an annual coupon of 7.5% for
95.5. One year later, the exchange rate between the ringgit and the foreign currency
remains unchanged and he sells the bond for 97.25, resulting in a holding period return of
9.7%. If the foreign currency had depreciated in relation to the ringgit, John’s return
would be:
A. greater than 9.7%.
B. less than 9.7%.
C. equal to 9.7%.
D. uncertain
32. Suppose that a corporate bond and a government bond have equivalent characteristics.
They both have a coupon rate of 6% paid annually and have two years remaining to
maturity. Assuming a flat government term structure of 7% which of the following is a
possible price of the corporate bond?
A. 97.76.
B. 98.19.
C. 101.35.
D. 103.47
33. All else equal, which of the following fixed coupon bonds would a bond investor who is
most concerned with price volatility likely to buy? A fixed coupon-bond with:
A. 10 years to maturity and an 8.5% coupon.
B. 10 years to maturity and a 6.5% coupon.
C. 15 years to maturity and an 8.5% coupon.
D. 20 years to maturity and a 6.5% coupon
34. The client who would like to invest in bonds with low interest rate risk would choose the
bond with a:
A. 20 year maturity and a yield to maturity of 5%.
B. 20 year maturity and a yield to maturity of 8%.
C. 10 year maturity and a yield to maturity of 5%.
D. 10 year maturity and a yield to maturity of 8%.
35. Which of the following statements about currency risk is most accurate? Generally:
A. appreciation of the foreign currency is good for domestic investors who buy foreign
securities.
B. depreciation of the foreign currency is good for domestic investors who buy foreign
securities.
C. if the foreign currency appreciates, the foreign cash flow will be worth less for the
domestic investor.
D. if the home currency appreciates against the foreign currency, each foreign currency
unit will be worth more in terms of the home currency.
36. Sally borrowed RM12,000 and repaid the loan 60 days later by a single payment of
RM12,900. What is the implied simple annual interest rate? (Assume that there are 365
days in a year.)
A. 4.63%
B. 45.63%
C. 14.53%
D. 25.63%
37. How many years will it take for $100 to grow to $298.60 if invested at 20% per annum,
compounded quarterly?
A. 3.51
B. 4.68
C. 5.61
D. 6.14
40. An issue of bonds with par of RM1000 matures in 15 years and pays 8% interest annually.
The market price of the bonds is RM1,085, and your required rate of return is 7.5% per
annum. Should you purchase the bond and what is the bond expected return?
A. Yes, because the bond expected return is 7.6%
B. Yes, because the bond expected return is 7.06%
C. No, because the bond expected return is 7.6%
D. No, because the bond expected return is 7.06%
1. The current cash dividend has just been paid for Huntress Constructions’s ordinary shares
and is RM2.00. Growth in this dividend is expected to be 10% for years 1, 2 and 3; then it
will drop to 4% for years 4 and 5, after which it is expected to be 2% to infinity. If the
required rate of return on this firm’s ordinary shares is 15%, what is the approximate
current market value of the share?
A. RM19.74
B. RM17.53
C. RM16.35
D. RM15.80
2. Company A wishes to estimate the value of its non-redeemable preference shares. The
shares were issued at RM80 per share and pay an annual dividend of RM6.40 per share.
Similar risk preferred shares are currently earning a 9.3% annual rate of return. What is
the market value of the share?
A. RM80.00
B. RM75.34
C. RM71.23
D. RM68.82
3. The ordinary shares of Company B are selling for RM32.84. The company pays
dividends annually and recently paid dividends of RM2.94 per share. The projected
growth rate is 9.5%. What is the cost of equity?
A. 18.42%
B. 18.25%
C. 17.64%
D. 16.47%
4. According to the constant growth dividend valuation model, what dividend yield is
expected for a share that has a current price of $20.00, a required return of 14% and a
dividend growth rate of 4%?
A. 5%
B. 7.5%
C. 10%
D. 12.5%
5. The dividend on Bedford Motors ordinary shares will be $0.50 in 1 year and $0.65 in 2
years. You know that you can sell a Bedford Motors share for $9.50 in 2 years and you
require a 17% return on your investment. How much would you be willing to currently
pay for a Bedford Motors share?
A. 8.74
B. 7.84
C. 4.78
D. 7.48
11. Calculate the price-earnings ratio (PER) of the stock of Company A, with the following
information:
Price = RM6.00
Profit before tax = RM75.0 million
Profit after tax = RM54.0 milllion
Retention ratio = 40%
Required rate of return = 15%
Total asset = RM500 million
Total liabilities = RM200 million
A. 7.10
B. 7.30
C. 7.50
D. 7.70
12. If Company B's earnings before interest and tax (EBIT) cannot decline more than 90% in
order to cover interest expenses, what is the interest earned ratio?
A. 10
B. 9
C. 8
D. 7
13. In comparison to common stock, the conventional nonconvertible preferred stock has:
A. preferential claim on a company's assets.
B. A predetermined dividend rate that may be increased at the company's discretion.
C. preferential voting rights.
D. all of the above.
14. The returns that investors get from equity investment include:
A. Capital gain
B. Dividend income
C. Coupon payment
D. Capital gain and dividend income
19. Which of the following is the limitation of using Price Earnings Ratio as a comparative
method in equity valuation?
A. EPS used is based on historical data, which does not take into account prospective
earnings.
B. Relate current earnings to price paid
C. Reflect the sentiment of the market
D. Simple to compute
20. Which of the following is not used in the Asset Basis Valuation?
A. Book value
B. Replacement value
C. Market value
D. Liquidation value
22. Which of the following is not part of the features of Convertible Unsecured Loan stock
(CULS)?
A. Convertible bonds, combine certain advantages of a bond with the option of
exchanging the bond for ordinary shares
B. Type of unsecured loan stock
C. Market price of CULS are influenced by their investment value and the price level
of the ordinary shares.
D. Tends to increase the cost of the money borrowed
23. A firm has an expected dividend payout ratio of 50%, a required rate of return of 12% and
a constant growth rate of 6%. If earnings for the next year are expected to be $4.50, the
value of the stock today is closest to:
A. $39.75.
B. $37.50.
C. $33.50.
D. $31.75
24. An investor is considering acquiring a common stock that he would like to hold for one
year. He expects to receive both $1.50 in dividends and $26 from the sale of the stock at
the end of the year. What is the maximum price he should pay for the stock today to earn
a 15 percent return?
A. $23.91
B. $24.19
C. $24.91
D. $25.19
25. Calculate the value of a common stock that last paid a $2.00 dividend if the required rate
of return on the stock is 14 percent and the expected growth rate of dividends and
earnings is 6 percent. What growth model is an example of this calculation?
Value of stock Growth model
A. $26.50 Super Growth
B. $26.50 Gordon Growth
C. $25.60 Super Growth
D. $25.60 Gordon Growth
26. A stock has a required rate of return of 15%, a constant growth rate of 10%, and a
dividend payout ratio of 45%.The stock’s price-earnings ratio should be:
A. 9.0 times
B. 7.5 times
C. 4.5 times
D. 3.0 times
27. Using an infinite period dividend discount model, find the value of a stock that last paid a
dividend of $1.50. Dividends are expected to grow at 6 percent forever, the expected
return on the market is 12 percent and the stock’s beta is 0.8. The risk-free rate of return
is 5 percent.
A. $26.50.
B. $32.61.
C. $34.57.
D. $36.50
28. Which of the following statements about the constant growth dividend discount model
(DDM) is least accurate?
A. The constant growth DDM is used primarily for stable mature stocks.
B. In the constant growth DDM dividends are assumed to grow at a constant rate
forever.
C. For the constant growth DDM to work, the required return on equity must exceed
the growth rate.
D. For the constant growth DDM to work, the growth rate must exceed the required
return on equity.
29. Company Y is a rapidly growing company that has increased free cash flow to equity and
dividends at an average rate of 25% per year for the last four years. The present value
model that is most appropriate for estimating the value of this company is a:
A. Gordon growth model.
B. single stage free cash flow to equity model.
C. multistage dividend discount model.
D. Discounted cash flow model
30. All else equal, if there is an increase in the required rate of return, a stock’s value as
estimated by the constant growth dividend discount model (DDM) will:
A. increase or decrease, depending upon the relationship between ke and ROE.
B. decrease.
C. increase.
D. Remain the same
Answers