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You are considering a project in Norway with an initial cost of NKr135,000. The project is expected to return a one-time payment of NKr200,000 at the end of Year 5. The risk-free rate of return is 2.6 percent in the […]

Graham and Harvey (2001) found that _____ were the two most popular capital budgeting methods. A. IRR and payback B. IRR and NPV C. NPV and PI D. IRR and modified IRR E. discounted payback and NPV Answer: Prepackaged bankruptcies: […]

Firm A is acquiring Firm T for $22,500 in cash. Firm A has 2,300 shares of stock outstanding at a market value of $26 a share. Firm T has 1,200 shares of stock outstanding at a market price of $17 […]

I. M. Greedy has been granted options on 500,000 shares. The stock is currently trading at $48 a share and the options are at the money. The standard deviation of returns averages 31 percent. The options mature in 5 years […]

Companies will generally have a: A. low beta if their sales are directly related to the market cycle. B. high beta if their sales are highly dependent on the market cycle. C. high beta if sales are independent of the […]

In a reverse stock split: A. the number of shares outstanding increases and owners’ equity decreases. B. the firm buys back existing shares of stock on the open market. C. the firm sells new shares of stock on the open […]

If a bond has a make-whole call provision, the: A. call premium can be either positive or negative. B. bond’s market price will always equal its face value. C. bondholder will receive the face value amount plus interest if the […]

The annual interest paid by a bond divided by the bond’s face value is called the: A. coupon. B. face value. C. maturity. D. yield to maturity. E. coupon rate. Answer: A flow of unending and equal payments that occur […]

Theo is depositing $1,300 today in an account with an expected rate of return of 8.1 percent. If he deposits an additional $3,200 two years from today, and $4,000 three years from today, what will his account balance be ten […]

A project has earnings before interest and taxes of $5,750, fixed costs of $50,000, a selling price of $13 a unit, and a sales quantity of 11,500 units. Depreciation is $7,500. What is the variable cost per unit? A. $6.75 […]

Three months ago, you purchased a put option contract on WXX stock with a strike price of $61 and an option price of $.60. The option expires today when the value of WXX stock is $63.50. Ignoring trading costs and […]

Based on the period of 1926 through 2014, _____ have tended to outperform other securities over the long-term. A. U.S. Treasury bills B. large-company stocks C. long-term corporate bonds D. small-company stocks E. long-term government bonds Answer: One advantage of […]

Westover Industries has 60,000 shares outstanding. Each share has one attached warrant. A warrant holder can purchase one new share of stock for five warrants plus $5 per warrant. The stock is currently selling for $27 per share. All else […]

A project will produce an operating cash flow of $7,300 a year for three years. The initial investment for fixed assets will be $11,600, which will be depreciated straight-line to zero over the asset’s 4-year life. The project will require […]

Metal Manufacturers receives three checks per month. The first check is for $194,000 and takes two days to clear. The second check is for $318,000 and clears in one day. The third check is for $38,000 and clears in 2.5 […]

A registration statement is effective on the 20th day after filing unless: A. the SEC is backlogged with statements. B. a tombstone ad is issued indicating its demise. C. a letter of comment suggesting changes is issued by the SEC. […]

The act where an owner of an option buys or sells the underlying asset, as is his right, is called ______ the option. A. striking B. exercising C. opening D. splitting E. strangling Answer: Event studies of dividend omissions indicate […]

Ted purchased an annuity today that will pay $1,000 a month for five years. He received his first monthly payment today. Allison purchased an annuity today that will pay $1,000 a month for five years. She will receive her first […]

Which one of the following statements is correct concerning the organizational structure of a corporation? A. The vice president of finance reports to the chairman of the board. B. The controller reports to the chief financial officer. C. The controller […]

Which one of the following statements is correct? A. Both partnerships and corporations incur double taxation. B. Sole proprietorships and partnerships are taxed in a similar fashion. C. Partnerships are the most complicated type of business to form. D. Both […]

In working on a bid project you have determined that $245,000 of fixed assets will be required and that they will be depreciated straight-line to zero over the 5-year life of the project. You have also determined that the discount […]

Your firm receives 46 checks per month. Of these, 13 are for $1,250 and 33 are for $870. The delay for the $1,250 checks is 1.5 days; the $870 checks are delayed 2 days. What is the weighted average delay? […]

Assuming market efficiency, which one of these is the least sensible explanation of why convertibles and warrants are issued? A. Cash flows from these securities best match the cash flows of the firm. B. The firm is relatively large with […]

A global conglomerate has a debt beta of zero. If the cost of equity is 12.23 percent, and the risk-free rate is 4.36 percent, what is the firm’s pretax cost of debt? A. 4.36% B. 8.30% C. 7.87% D. 0% […]

Bikes and More just announced its next annual dividend will be $2.42 a share and all future dividends will increase by 2.5 percent annually. What is the market rate of return if this stock is currently selling for $22 a […]

Assume the delta of a call option on a firm’s assets is .608. This means a $65,000 project will increase the value of the firm’s equity by: A. $27,902. B. $39,520. C. $43,820. D. $63,131. E. $89,600. Answer: Which one […]

Which one of the following is most apt to cause a firm to have a higher price-earnings ratio? A. slow industry outlook B. very low current earnings C. low market share D. low prospect of firm growth E. low investor […]

The price of one country’s currency expressed in terms of another country’s currency is called the: A. absolute currency rate. B. cross inflation rate. C. depository rate. D. exchange rate. E. foreign interest rate. Answer: A merger in which an […]

Over the period of 1926 through 2014, the annual rate of return on _____ has been more volatile than the annual rate of return on _____. A. large-company stocks; small-company stocks B. U.S. Treasury bills; small-company stocks C. U.S. Treasury […]

Which one of these is a positive covenant? A. The firm must maintain a current ratio of 1.2 or better. B. The firm will not issue any debt with higher seniority. C. The firm cannot be acquired in a friendly […]

Which one of the following is a correct statement concerning risk premium? A. The greater the volatility of returns, the greater the risk premium. B. The lower the volatility of returns, the greater the risk premium. C. The lower the […]

Derivatives can be used to either hedge or speculate. These strategies: A. increase risk in both cases. B. decrease risk in both cases. C. spread or minimize risk in both cases. D. offset risk by hedging and increase risk by […]

Leo received $7,500 today and will receive another $5,000 two years from today. He will invest these funds when he receives them and expects to earn a rate of return of 11.5 percent. What value does he expect his investments […]

The forward rate market is dependent upon: A. current forward rates exceeding current spot rates. B. current spot rates exceeding current forward rates over time. C. current spot rates equaling current forward rates on average over time. D. forward rates […]

The delta of a call measures the: A. time remaining to expiration compared to the option’s original maturity. B. change between an option’s original value and its current value. C. swing in the price of the call relative to the […]

Ratios that measure how efficiently a firm uses its assets to generate sales are known as _______ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. market value Answer: Stock K is expected to return 12.4 […]

Four Wheels requires $1.75 million to fund a new project and has decided to raise the funds via a seasoned stock offering. Assume the firm will incur $140,000 in indirect costs and pay 8.63 percent of the gross proceeds in […]

Starting today, Alicia is going to contribute $100 a month to her retirement account. Her employer matches her contribution by 50 percent. If these contributions remain constant, and she earns a monthly rate of .55 percent, how much will her […]

Enterprise value equals the: A. combined market value of debt and equity minus excess cash. B. market value of equity minus the market value of debt plus excess cash. C. market value of debt plus the book value of equity […]

Individuals that continually monitor the financial markets seeking mispriced securities: A. tend to make substantial profits on a daily basis. B. tend to make the markets more efficient. C. are never able to find a security that is temporarily mispriced. […]

Suppose the Simmons Co’s common stock has a beta of 1.37, the risk-free rate is 3.4 percent, and the market risk premium is 8.2 percent. The yield to maturity in the firm’s bonds is 7.6 percent and the debt-equity ratio […]

The discount rate that makes the net present value of an investment exactly equal to zero is called the: A. external rate of return. B. internal rate of return. C. average accounting return. D. profitability index. E. equalizer. Answer: A […]

Small Town Bank has total assets with a market value of $14.23 million and a duration of 2.64 years. The bank’s liabilities equal $12.87 million and its equity is $1.36 million on a market value basis. To hedge interest rate […]

You recently purchased a stock that is expected to earn 12.6 percent in a booming economy, 8.9 percent in a normal economy and lose 5.2 percent in a recessionary economy. Each economic state is equally likely to occur. What is […]

Permanently rejecting an investment project today may not be a wise decision primarily because: A. the size of the firm will be less than it would be with the project. B. there are always errors in the estimation of NPVs. […]

The Highlight Company is reviewing a proposed 7-year project with an initial cost of $687,400. The annual fixed costs are $92,800, the variable cost per unit is $49.79, and the sales price per unit is $89. The tax rate is […]

Parametric or empirical models rely: A. on security betas explaining systematic factor relationships. B. on finding regularities and relations in past market data. C. on security returns always being located on the capital market line. D. solely on factors within […]

The intrinsic value of a put is equal to the: A. lesser of the strike price or the stock price. B. lesser of the stock price minus the exercise price or zero. C. lesser of the stock price or zero. […]

Which one of these statements is true? A. The cumulative finance surplus requirement is computed prior to adjusting for the minimum cash balance. B. A financially sound firm will always have a positive quarterly net cash flow. C. A negative […]

To determine the value of a rights offering, the stockholder needs to know the following two pieces of information in addition to the current stock price, the: A. subscription price and the number of rights needed to acquire a new […]

A&M Hardware assumes new customers will default 8 percent of the time but if they don”t default, they will become repeat customers who always pay their bills. Assume the average sale is $383 with a variable cost of $260, and […]

The forward rate is most apt to equal the spot rate when: A. the real rate of interest is declining. B. the inflation rates in the two countries are equal. C. purchasing power parity exists. D. the real rates of […]

Uptown Clothing just paid $1.50 as its annual dividend and increases its dividend by 2.5 percent each year. What will Uptown’s stock price be in ten years at a discount rate of 12.25 percent? A. $19.46 B. $22.08 C. $20.19 […]

The hypothesis that market prices reflect all publicly available information is called _____ form efficiency. A. open B. strong C. semistrong D. weak E. stable Answer: Denise will receive annual payments of $10,000 for the next 25 years. The discount […]

The positive incremental net gain associated with the combination of two firms through a merger or acquisition is called: A. the agency conflict. B. goodwill. C. the merger cost. D. the consolidation effect. E. synergy. Answer: The basic assumption of […]

BT Corporation has decided to build a new facility for its Ramp;D department. The cost of the facility is estimated at $125 million. BT plans to finance this project using its traditional debt-equity ratio of .65. The issue cost of […]

Thompson’s has determined that a new project is expected to have fixed costs of $132,378, a contribution margin of $36.20, and a tax rate of 34 percent. The investment has an initial cost of $548,000 that will be depreciated straight-line […]

Which one of the following is the best example of systematic risk? A. the price of lumber declines sharply B. airline pilots go on strike C. the Federal Reserve increases interest rates D. a hurricane hits a tourist destination E. […]

Consider a bond with a coupon rate of 8 percent that pays semiannual interest and matures in eight years. The market rate of return on bonds of this risk is currently 11 percent. What is the current value of a […]

A trading opportunity that offers a riskless profit is called a(n): A. put option. B. call option. C. market equilibrium. D. arbitrage. E. cross-hedge. Answer: Marshall’s purchased a corner lot five years ago at a cost of $498,000 and then […]

Assume the single-factor APT model is applied to a security that has a negative factor beta. The security will: A. always have a positive rate of return. B. have an expected return greater than the risk-free rate. C. have an […]

The unlevered cost of capital is: A. the cost of capital for a firm with no equity in its capital structure. B. the cost of capital for a firm with no debt in its capital structure. C. the interest tax […]

You expect an investment to return $11,300, $14,600, $21,900, and $38,400 annually over the next four years, respectively. What is this investment worth to you today if you desire a rate of return of 16.5 percent? A. $64,253.91 B. $58,700.89 […]