Question 1
Which of the following statements is CORRECT?
A. Firms with a large number of investment opportunities and a relatively small amount of cash tend to have above average dividend payout ratios.
B. One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like.
C. An increase in the stock price when a company decreases its dividend is consistent with signaling theory.
D. If the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price.
E. Stock repurchases make the most sense at times when a company believes that its stock is undervalued.
Question 2
Which of the following statements is CORRECT?
A. If a firm repurchases its stock in the open market, then shareholders who sell their stock for more than they paid for it will be subject to capital gains taxes.
B. An open-market dividend reinvestment plan will be most attractive to companies that need new equity and would be looking to issue additional shares of common stock.
C. Stock repurchases tend to reduce financial leverage.
D. If a company declares a 2-for-1 stock split, its stock price should roughly double.
E. One advantage of adopting the residual dividend policy is that this makes it easier for corporations to satisfy their stockholders in the sense of Modigliani and Miller's dividend clientele theory.
Question 3
Kleck Corporation has $500,000 of inventory, and its annual sales are $3,000,000. Based on a 365 day year, what is Kleck's inventory conversion period?
A. 56.49 days
B. 57.04 days
C. 60.83 days
D. 62.81 days
E. 65.27 days
Question 4
If Hudson Inc borrows $500,000 on a 10% add-on basis, payable in 12 equal end-of-month installments, how large would the monthly payments be?
A. $45,666.67
B. $45,833.33
C. $46,000.00
D. $46,166.67
E. $46,333.33
Question 5
Carroll Construction has annual sales of $730,000, and it has $100,000 of accounts receivable. Based on a 365-day year, what is Carroll's average collection period (or DSO)?
A. 50 days
B. 52 days
C. 54 days
D. 56 days
E. 58 days
Question 6
If a firm borrowed $50,000 at a rate of 9%, simple interest, with monthly interest payments and a 365-day year, what would the effective annual rate on this loan be?
A. 8.84%
B. 9.02%
C. 9.38%
D. 9.61%
E. 9.99%