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 bond is called.
D. bondholder will receive the face value amount minus any interest paid to date if the
bond is called.
E. call price will increase as interest rates decrease.
Answer:
The reason that MM Proposition I does not hold in the presence of corporate taxation is
because:
A. levered firms pay less taxes compared with identical unlevered firms.
B. bondholders require higher rates of return than stockholders do.
C. earnings per share are no longer relevant with taxes.
D. dividends become a tax shield.
E. debt is more expensive than equity.
Answer:
Which of the following are conditions that Andrei Shleifer presents as the conditions
that create market efficiency?
A. arbitrage, independent deviations from rationality, rationality
B. competition, arbitrage, and rational investors
C. rational investors, dependent deviations from rationality, and competition
D. wide public access to information, rational investors, and arbitrage
E. professional investors, easy access to information, rational independent investors
Answer:
A newspaper listing of bond prices has an “Asked yield” column. This yield is based on
the asked price and represents the:
A. yield to maturity.
B. difference between the current yield and the yield to maturity.
C. difference between the bond’s yield and the yield of a comparable Treasury issue.
D. coupon rate.
E. current yield.
Answer:
The foreign exchange market is where:
A. one country’s stocks are exchanged for another’s.
B. one country’s bonds are exchanged for another’s.
C. one country’s currency is traded for another’s.
D. international banks make loans to one another.
E. international businesses finalize import/export relationships with one another.
Answer:
In the three years prior to a forced departure of a top manager, stock prices, adjusted for
market performance, on average:
A. decline about 20 percent.
B. decline about 40 percent.
C. decline about 60 percent.
D. remain stable.
E. increase about 20 percent.
Answer:
An appropriate cash balance is reached when the:
A. interest on any marketable security is maximized.
B. interest foregone from not investing in Treasury bills is minimized.
C. value of cash liquidity equals interest foregone on an equivalent amount of Treasury
bills.
D. liquidity value is greater than the interest foregone on an equivalent amount of
Treasury bills.
E. balance is maintained at a zero level.
Answer:
An increase in total assets:
A.means that net working capital is also increasing.
B.requires an investment in fixed assets.
C.means that stockholders’ equity must also increase.
D.must be offset by an equal increase in liabilities and stockholders’ equity.
E.can only occur when a firm has positive net income.
Answer:
Donaldson’s purchased some property for $1.2 million, paid 25 percent down in cash,
and financed the balance for 12 years at 7.2 percent, compounded monthly. What is the
amount of each monthly mortgage payment?
A. $8,440.01
B. $8,978.26
C. $9,351.66
D. $9,399.18
E. $9,513.67
Answer:
An investor discovers that for a certain group of stocks, large positive price changes are
always followed by large negative price changes. This finding is a violation of the ___
form of the efficient market hypothesis.
A. moderate
B. semistrong
C. strong
D. weak
E. historical
Answer:
Your employer contributes $50 a week to your retirement plan. Assume you work for
your employer for another twenty years and the applicable discount rate is 5 percent,
compounded weekly. Given these assumptions, what is this employee benefit worth to
you today?
A. $29,144.43
B. $35,920.55
C. $32,861.08
D. $26,446.34
E. $36,519.02
Answer:
To compute the value of a put using the Black-Scholes option pricing model, you:
A. first have to apply the put-call parity relationship.
B. first have to compute the value of both N(-d1) and N(-d2).
C. compute the value of an equivalent call and then subtract that value from one.
D. compute the value of an equivalent call and then subtract that value from the market
price of the stock.
E. compute the value of an equivalent call and then multiply that value by e-RT.
Answer:
The Down Towner is considering a 4-year project that will require $164,800 for fixed
assets and $42,400 for net working capital. The fixed assets will be depreciated
straight-line to a zero book value over the life of the project. At the end of the project,
the fixed assets can be sold for $37,500 and the net working capital will return to its
original level. The project is expected to generate annual sales of $195,000 and costs of
$117,500. The tax rate is 35 percent and the required rate of return is 13 percent. What
is the project’s net present value?
A. $48,909.09
B. $26,485.23
C. $67,316.67
D. $36,500.00
E. $59,488.87
Answer:
Liquidity is:
A.a measure of the use of debt in a firm’s capital structure.
B.equal to current assets minus current liabilities.
C.equal to the market value of a firm’s total assets minus its total liabilities.
D.valuable to a firm even though liquid assets tend to be less profitable to own.
E.generally associated with intangible assets.
Answer:
What is the net present value of a project that has an initial cash outflow of $7,670 and
cash inflows of $1,280 in Year 1, $6,980 in Year 3, and $2,750 in Year 4? The discount
rate is 12.5 percent.
A. $86.87
B. $270.16
C. $68.20
D. $249.65
E. $371.02
Answer:
Chocolate and More offers a bond with a coupon rate of 6 percent, semiannual
payments, and a yield to maturity of 7.73 percent. The bonds mature in 9 years. What is
the market price of a $1,000 face value bond?
A. $889.29
B. $963.88
C. $1,008.16
D. $924.26
E. $901.86
Answer:
What is the cash flow of the firm for 2015?
A.$885
B.$8,042
C.$7,297
D.$6,425
E.$5,517
Answer:
JR’s is preparing to start a new project in an industry that differs significantly from its
current operations. JR’s has searched and found the beta of a firm that is a good fit as a
good pure play for this new project. Given this good fit, why might JR’s assign a higher
beta to the project than the beta of the pure play?
A. The generally accepted practice would be to assign a beta to the project that is based
on the average of the firm’s beta and the pure play’s beta.
B. The revenues of the project may be expected to be less cyclical than those of the pure
play.
C. The firm may use less debt in its operations than does the pure play.
D. The new project may be more responsive to the economy than the pure play and thus
represent a higher risk.
E. The project may incur flotation costs so a higher beta is warranted to offset the
additional cost.
Answer:
Assets are listed on the balance sheet in order of:
A.decreasing liquidity.
B.decreasing size.
C.increasing size.
D.market value relative to book value.
E.increasing liquidity.
Answer:
Triangle arbitrage:
A. no longer exists due to the advanced electronic communications used in today’s
markets.
B. only applies to forward exchange rates.
C. helps keep the currency market in equilibrium.
D. opportunities can only be found in the spot market.
E. only involves currencies other than the U.S. dollar.
Answer:
Assume you could invest $25,000 at a continuously compounded rate of 10 percent.
What would your investment be worth at the end of 50 years?
A. $2,933,054
B. $3,500,824
C. $3,911,215
D. $3,710,329
E. $3,648,029
Answer:
The equity multiplier measures:
A. financial leverage.
B. returns to stockholders.
C. operating efficiency.
D. management efficiency.
E. asset use efficiency.
Answer:
Brewster’s is considering a project with a 5-year life and an initial cost of $120,000. The
discount rate for the project is 12 percent. The firm expects to sell 2,100 units a year at
a cash flow per unit of $20. The firm will have the option to abandon this project after
three years at which time it could sell the project for $50,000. At what level of sales
should the firm be willing to abandon this project at the end of the third year?
A. 420 units
B. 1,041 units
C. 1,479 units
D. 1,618 units
E. 2,500 units
Answer:
The optimal capital structure of a firm _____ the marketable claims and _____ the
nonmarketable claims against the cash flows of the firm.
A. minimizes; minimizes
B. minimizes; maximizes
C. maximizes; minimizes
D. maximizes; maximizes
E. equates; (leave blank)
Answer:
In an EPS-EBI graphical relationship, the slope of the debt ray is steeper than the equity
ray. The debt ray has a lower intercept because:
A. more shares are outstanding for the same level of EBI.
B. the break-even point is higher with debt.
C. a fixed interest charge must be paid even at low earnings.
D. the amount of interest per share has only a positive effect on the intercept.
E. the break-even point is lower with debt.
Answer:
Assume you own 300 shares of ABC stock and receive a stock dividend of 5 percent.
As a result, the number of shares you own will change to _____ shares while your total
wealth will increase by ___ percent.
A. 305; 5
B. 315; 0
C. 305; 0
D. 315; 5
E. 300; 5
Answer:
Suppose ABC’s common stock has a return of 12.87 percent, the risk-free rate is 2.65
percent, the market return is 13.46 percent, and there is currently no unsystematic
influence affecting ABC’s return. Given a one-factor APT model, what is the factor
beta?
A. .896
B. .945
C. 1.003
D. .962
E. .979
Answer:
If current shareholders want to acquire one share of stock under a rights plan they must:
A. acquire new shares of stock that are being issued with rights attached.
B. simply pay a registration fee plus the subscription price per share requested.
C. submit the number of rights required plus the subscription price.
D. inform the issuer and submit the market price per share desired.
E. exchange their current shares for new shares that have rights attached.
Answer:
Which one of the following sets of ratios would generally be of the most interest to
stockholders?
A. return on assets and profit margin
B. quick ratio and times interest earned
C. price-earnings ratio and debt-equity ratio
D. return on equity and price-earnings ratio
E. cash coverage ratio and equity multiplier
Answer:
Seasonal dating is used to promote sales during the off-season. This process involves:
A. extending the credit period until after the season ends.
B.extending both the discount period and the credit period by two months.
C. accepting orders early but withholding shipment until the peak season.
D. accepting orders early but dating the invoice when the goods are actually shipped.
E. dating an invoice at a later date than when the goods are shipped.
Answer:
A zero coupon bond:
A. is sold at a large premium.
B. has a price equal to the future value of the face amount given a positive rate of
return.
C. can only be issued by the U.S. Treasury.
D. has less interest rate risk than a comparable coupon bond.
E. has a market price that is computed using semiannual compounding of interest.
Answer:
Alpha stock has an expected return of 8.2 percentand betas of: βGNP = 1.23; βI = .97;
and βEx = 1.08. This expectation is based on a three-factor model with expected values
of: GNP growth of “1 percent; inflation of 2.4 percent; and export growth of 3.5
percent. However, actual growth in these factors turns out to be .55 percent,1.8 percent,
and 2.6 percent, respectively. Assuming there was no unexpected news related
specifically to the stock, what was the stock’s total rate of return?
A. 8.04%
B. 8.55%
C. 8.47%
D. 7.85%
E. 8.85%
Answer:
What is the future value of $845 a year for seven years at an interest rate of 11.3
percent?
A. $6,683.95
B. $6,075.69
C. $8,343.51
D. $8,001.38
E. $8,801.91
Answer: