, Question 1
A firm reports net income of $4.2M, depreciation of $1.1M, an increase in
accounts receivable of $0.8M, and a decrease in accounts payable of $0.5M.
Using the indirect method, what is cash flow from operating activities?
A. $4.0M
B. $6.6M
C. $4.6M
D. $5.2M
Correct Answer: A - $4.0M
RATIONALE
CFO = NI + depreciation AR AP = 4.2 + 1.1 0.8 0.5 = $4.0M.
Increases in receivables use cash and decreases in payables use cash.
Distractors reflect sign errors or omitting working-capital adjustments.
Question 2
A bond has a 6% annual coupon, 10 years to maturity, and a yield to maturity
of 8%. Which statement about this bond is correct?
A. It trades at par because coupon equals the market rate.
B. Its price exceeds par because the coupon is fixed.
C. It trades at a discount, and its price rises toward par as maturity
approaches.
D. Its current yield is below the coupon rate.
Correct Answer: C - It trades at a discount, and its price rises
toward par as maturity approaches.
RATIONALE
When YTM > coupon rate, the bond trades below par (discount) and
converges to par at maturity (pull-to-par). Current yield (coupon/price)
actually exceeds the coupon rate for a discount bond, ruling out D.
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, Question 3
A project requires $500,000 initial investment and generates $150,000 annually
for 5 years. At a 10% required return, what is the NPV, and what decision
follows?
A. NPV $68,618; accept
B. NPV $68,618; reject
C. NPV $68,618; reject
D. NPV $250,000; accept
Correct Answer: A - NPV $68,618; accept
RATIONALE
PV of annuity = 150,000 × 3.7908 = $568,618; NPV = $68,618 > 0, so
accept. A positive NPV adds value; the other options misstate the sign
or magnitude.
Question 4
A company has DOL of 2.5 and DFL of 1.6. If sales increase 10%, by
approximately what percentage does EPS change?
A. 16%
B. 25%
C. 40%
D. 10%
Correct Answer: C - 40%
RATIONALE
DTL = DOL × DFL = 4.0; %EPS = 4.0 × 10% = 40%. DOL captures
operating leverage and DFL financial leverage; their product links
sales to EPS.
Page 3
A firm reports net income of $4.2M, depreciation of $1.1M, an increase in
accounts receivable of $0.8M, and a decrease in accounts payable of $0.5M.
Using the indirect method, what is cash flow from operating activities?
A. $4.0M
B. $6.6M
C. $4.6M
D. $5.2M
Correct Answer: A - $4.0M
RATIONALE
CFO = NI + depreciation AR AP = 4.2 + 1.1 0.8 0.5 = $4.0M.
Increases in receivables use cash and decreases in payables use cash.
Distractors reflect sign errors or omitting working-capital adjustments.
Question 2
A bond has a 6% annual coupon, 10 years to maturity, and a yield to maturity
of 8%. Which statement about this bond is correct?
A. It trades at par because coupon equals the market rate.
B. Its price exceeds par because the coupon is fixed.
C. It trades at a discount, and its price rises toward par as maturity
approaches.
D. Its current yield is below the coupon rate.
Correct Answer: C - It trades at a discount, and its price rises
toward par as maturity approaches.
RATIONALE
When YTM > coupon rate, the bond trades below par (discount) and
converges to par at maturity (pull-to-par). Current yield (coupon/price)
actually exceeds the coupon rate for a discount bond, ruling out D.
Page 2
, Question 3
A project requires $500,000 initial investment and generates $150,000 annually
for 5 years. At a 10% required return, what is the NPV, and what decision
follows?
A. NPV $68,618; accept
B. NPV $68,618; reject
C. NPV $68,618; reject
D. NPV $250,000; accept
Correct Answer: A - NPV $68,618; accept
RATIONALE
PV of annuity = 150,000 × 3.7908 = $568,618; NPV = $68,618 > 0, so
accept. A positive NPV adds value; the other options misstate the sign
or magnitude.
Question 4
A company has DOL of 2.5 and DFL of 1.6. If sales increase 10%, by
approximately what percentage does EPS change?
A. 16%
B. 25%
C. 40%
D. 10%
Correct Answer: C - 40%
RATIONALE
DTL = DOL × DFL = 4.0; %EPS = 4.0 × 10% = 40%. DOL captures
operating leverage and DFL financial leverage; their product links
sales to EPS.
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