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 and the risk-free rate is 3.68 percent.
What is the value of e-rt?
A. .6087
B. .7087
C. .7952
D. .8476
E. .8319
Answer:
Calculate the duration of a $1,000 face value bond with annual coupon payments, a
coupon rate of 7 percent, a maturity of 4 years, and a yield to maturity of 8.2 percent.
A. 3.49 years
B. 3.62 years
C. 3.69 years
D. 3.81 years
E. 3.74 years
Answer:
Which one of these is a con of paying dividends?
A. Paying dividends reduces agency costs when excess cash is available.
B. Dividends can be used to signal a firm’s optimistic outlook.
C. Dividends are frequently taxed as ordinary income.
D. Dividends appeal to income-seeking investors.
E. Managers can pay dividends to keep cash from bondholders.
Answer:
The sales level that results in a project’s net income exactly equaling zero is called the
_____ break-even.
A. operational
B. leveraged
C. accounting
D. cash
E. present value
Answer:
Martha B’s has total assets of $1,810. These assets are expected to increase in value to
either $1,900 or $2,400 by next year. The company has a pure discount bond
outstanding with a face value of $2,000. This bond matures in one year. Currently, U.S.
Treasury bills are yielding 5.5 percent. What is the value of the equity in this firm?
A. $6.98
B. $7.24
C. $6.67
D. $7.08
E. $7.89
Answer:
Which one of these bonds has the lowest percentage price change for a stated shift in
interest rates?
A. 5-year, zero coupon
B. 5-year high coupon
C. 5-year low coupon
D. 10-year low coupon
E. 10-year high coupon
Answer:
The first public equity issue offered by a company is commonly referred to as a(n):
A. initial private offering.
B. initial public offering.
C. secondary offering.
D. seasoned new issue.
E. registered issue.
Answer:
Using the internal rate of return method, a conventional investment project should be
accepted if the internal rate of return is:
A. equal to the discount rate.
B. greater than the discount rate.
C. less than the discount rate.
D. negative.
E. positive.
Answer:
There are always ___ counterparties in a credit default swap:
A. 0
B. 1
C. 2
D. 3
E. more than three
Answer:
Puffy’s Pastries generates five cents of net income for every $1 in equity. Thus, Puffy’s
has _______ of 5 percent.
A. a return on assets
B. a profit margin
C. a return on equity
D. an EV multiple
E. a price-earnings ratio
Answer:
Big Ed’s Electrical has a pure discount bond that comes due in one year and has a face
value of $1,000. The risk-free rate of return is 4 percent. The assets of Big Ed’s are
expected to be worth either $800 or $1,300 in one year. Currently, these assets are
worth $1,140. What is the current value of the debt of Big Ed’s Electrical?
A. $222.46
B. $370.77
C. $514.28
D. $769.23
E. $917.54
Answer:
Oversubscription is most commonly the result of:
A. unsuccessful book building.
B. underpricing.
C. exercising the Green Shoe option.
D. a negotiated, rather than a competitive underwriting.
E. unexercised rights.
Answer:
Which one of the following best describes the primary advantage of being a limited
partner rather than a general partner?
A. entitlement to a larger portion of the partnership’s income
B. ability to manage the day-to-day affairs of the business
C. no potential financial loss
D. greater management responsibility
E. liability for firm debts is limited to the capital invested
Answer:
When computing the expected return on a portfolio of stocks the portfolio weights are
based on the:
A. number of shares owned in each stock.
B. price per share of each stock.
C. market value of the total shares held in each stock.
D. original amount invested in each stock.
E. cost per share of each stock held.
Answer:
An agreement to trade currencies based on the exchange rate today for settlement
within two business days is called a(n) _____ trade.
A. swap
B. option
C. futures
D. forward
E. spot
Answer:
From a cash flow position, which one of the following ratios best measures a firm’s
ability to pay the interest on its debts?
A. times interest earned ratio
B. cash coverage ratio
C. cash ratio
D. quick ratio
E. interval measure
Answer:
All else constant, the accounting break-even level of sales will decrease when the:
A. fixed costs increase.
B. depreciation expense decreases.
C. contribution margin decreases.
D. variable costs per unit increase.
E. selling price per unit decreases.
Answer:
A project will increase sales by $140,000 and cash expenses by $95,000. The project
will cost $100,000 and will be depreciated using the straight-line method to a zero book
value over the 4-year life of the project. The company has a marginal tax rate of 34
percent. What is the value of the depreciation tax shield?
A. $8,500
B. $17,000
C. $22,500
D. $25,000
E. $37,750
Answer:
A proxy fight occurs when:
A. the board of directors disagree on the members of the management team.
B. a group solicits voting rights to replace the board of directors.
C. a competitor offers to sell their ownership interest in the firm.
D. the firm files for bankruptcy.
E. the firm is declared insolvent.
Answer:
Nu-Tech is expecting a period of intense growth and has decided to reduce its annual
dividend by 10 percent a year for the next two years. After that, it will maintain a
constant dividend of $.70 a share. Last year, the company paid $1.80 per share. What is
the value of this stock if the required rate of return is 13 percent?
A. $6.99
B. $6.79
C. $8.22
D. $8.87
E. $7.62
Answer:
Assume BGL Enterprises increases its operating efficiency by lowering its costs while
holding its sales constant. As a result, given all else constant, the:
A. return on equity will increase.
B. return on assets will decrease.
C. profit margin will decline.
D. equity multiplier will decrease.
E. price-earnings ratio will increase.
Answer:
The length of time between the acquisition of inventory by a firm and the payment by
the firm for that inventory is called the:
A. operating cycle.
B. inventory period.
C. accounts receivable period.
D. accounts payable period.
E. cash cycle.
Answer:
Rosita’s announced that its next annual dividend will be $1.65 a share and all future
dividends will increase by 2.5 percent annually. What is the maximum amount you
should pay to purchase a share of this stock if you require a 12 percent rate of return?
A. $13.75
B. $17.80
C. $15.46
D. $16.94
E. $17.37
Answer:
A bond with a face value of $1,000 can be exchanged for 35 shares of stock with a
current market price of $22 per share. What would the conversion price and conversion
ratio be if the bond’s issuer declared a 3-for-1 stock split?
A. $7.33; 75
B. $9.52; 105
C. $22.00; 105
D. $22.00; 35
E. $7.33; 75
Answer:
A commercial draft typically:
A. specifies the payment amount and payment date.
B. specifies that the purchaser use the seller’s bank as the guarantor.
C. requires payment prior to the delivery of the goods.
D. is signed upon delivery of the goods.
E. involves a lien on the purchasers’ current assets.
Answer:
The legal proceeding for liquidating or reorganizing a firm operating in default is called
a:
A. tender offer.
B. bankruptcy.
C. merger.
D. takeover.
E. proxy fight.
Answer:
If financial markets are efficient, then attempting to accurately predict interest rates is:
A. an endeavor best left to corporate executives.
B. a relatively easy and accurate exercise.
C. a waste of good time.
D. relatively easy to do if you have a general understanding of finance and economics.
E. a little tricky but wise managers tend to succeed at it on an ongoing basis.
Answer:
Under the _______ method, the underwriter buys the securities for less than the offering
price and accepts the risk of not selling the issue, while under the _______ method, the
underwriter does not purchase the shares but merely acts as an agent.
A. best efforts; firm commitment
B. firm commitment; best efforts
C. negotiated offer; competitive offer
D. competitive offer; negotiated offer
E. seasoned; unseasoned
Answer:
Which one of these statements is correct?
A. In the U.S. economy, dividends are quite insignificant.
B. Over the last few decades, the percentage of U.S. firms paying dividends has
increased.
C. The tax law change in May 2003 is cited as one reason why the percentage of
dividend payers has decreased in the U.S.
D. Dividends are more tax-advantaged than capital gains.
E. Much of the dividend income paid in the U.S. is related to a small number of firms.
Answer:
Webster Corp. is planning to build a new shipping depot. The initial cost of the
investment is $1.18 million. Efficiencies from the new depot are expected to reduce
annual costs by $105,000 forever. The corporation has a total value of $62.4 million and
has outstanding debt of $38.7 million. What is the NPV of the project if the firm has an
aftertax cost of debt of 5.8 percent and a cost equity of 12.6 percent?
A. $72,580.87
B. $46,509.07
C. $163,669.25
D. -$102,422.16
E. -$531,736.42
Answer:
Analysts estimate that a bond has a 40 percent probability of being priced at $950 and a
60 percent probability of being priced at $1,050 one year from today. The bond is also
callable at any time at $1,010. What is the expected value of this bond in one year?
A. $995
B. $980
C. $1,000
D. $1,010
E. $986
Answer:
All of the following can provide credit information about a customer except:
A. the customer’s financial statements.
B. credit reports.
C. the customer’s current payment history with the seller.
D. the amount of goods the customer desires to purchase.
E. banks.
Answer: