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 taxes, what is your total profit on your
investment?
A. -$310
B. -$60
C. $0
D. $60
E. $190
Answer:
The first step in materials requirements planning is establishing the:
A. desired minimum inventory level.
B. finished goods inventory level.
C. cost of each order.
D. delivery time required for each type of raw material.
E. value of each inventory item as a percent of total inventory.
Answer:
Assume today is an earnings announcement day for a firm. For the day, the firm’s return
was .8 percent, while the risk-free daily rate was .01 percent and the market rate of
return was 1.1 percent. The firm’s industrial class returned 1.2 percent on average for
the day. What was the firm’s abnormal return for the day?
A. .8 percent
B. .79 percent
C. “.3 percent
D. “.4 percent
E. “.39 percent
Answer:
Firm A is planning on merging with Firm B. Firm A currently has 2,300 shares of stock
outstanding at a market price of $20 a share. Firm B has 750 shares outstanding at a
price of $15 a share. The merger will create $200 of synergy. How many of its shares
should Firm A offer in exchange for all of Firm B’s share if it wants its acquisition cost
to be $12,000?
A. 598
B. 607
C. 600
D. 584
E. 593
Answer:
A going-private transaction in which a large percentage of the money used to buy the
outstanding stock is borrowed is called a:
A. tender offer.
B. proxy contest.
C. merger.
D. leveraged buyout.
E. consolidation.
Answer:
Diamond Drill has 150,000 shares of stock outstanding at a market price of $46 a share.
The holder of a $1,000 face value bond can exchange the bond at any time for 25 shares
of stock. What is the conversion price?
A. $40
B. $46
C. $43
D. $25
E. $20
Answer:
The optimal capital structure:
A. will be the same for all firms in the same industry.
B. will remain constant over time unless the firm makes an acquisition.
C. of a firm will vary over time as taxes and market conditions change.
D. places more emphasis on the operations of a firm rather than the financing of a firm.
E. is unaffected by changes in the financial markets.
Answer:
Which one of these parties would generally have the most reason to take a short hedge
position in the agricultural futures market?
A. a local bakery
B. a wheat farmer
C. a major breakfast food company
D. a beverage maker
E. an international investor
Answer:
A stock split:
A. increases the total value of the common stock account.
B. decreases the value of the retained earnings account.
C. does not affect the total value of any of the equity accounts.
D. increases the value of the capital in excess of par account.
E. decreases the total owners’ equity on the balance sheet.
Answer:
TH Manufacturers expects to generate cash flows of $129,600 for the next two years.
At the end of the two years the business will be sold for an estimated $3.2 million.
What is the value of this business at a discount rate of 14 percent?
A. $2,704,654.82
B. $2,284,644.28
C. $2,675,703.29
D. $2,848,391.60
E. $2,900,411.36
Answer:
A stock was priced at $23.08, $24.15, $23.99, and $24.26 at end of Years 1 to 4,
respectively, The annual dividend is constant at $.20 a share. What is the geometric
average return on this stock?
A. 3.27%
B. 2.52%
C. 2.56%
D. 2.48%
E. 3.31%
Answer:
Seasonal dating of accounts receivable:
A. is used by all firms that grant credit.
B. sets the first date of the relevant season as the final due date for an invoice for
seasonal goods.
C. sets a relevant seasonal date as the invoice date for an earlier order.
D. refers to firms that invoice every quarter for sales made in the past three months.
E. requires all purchasers of seasonal goods to have their purchases paid by the end of
the prior season.
Answer:
A firm may want to divest itself of some of its assets for all of these reasons except to:
A. raise cash.
B. eliminate unprofitable operations.
C. eliminate some recently acquired assets.
D. cash in on profitable operations.
E. eliminate some synergy.
Answer:
Martha’s Enterprises spent $4,100 to purchase equipment three years ago. This
equipment is currently valued at $2,700 on today’s balance sheet but could actually be
sold for $3,200. Net working capital is $400 and long-term debt is $2,300. Assuming
the equipment is the firm’s only fixed asset, what is the book value of shareholders’
equity?
A.$1,300
B.$800
C.$1,600
D.$1,900
E.$2,200
Answer:
The acquisition of a firm involved with a different production process stage than the
bidder is called a _____ acquisition.
A. conglomerate
B. forward
C. backward
D. horizontal
E. vertical
Answer:
Assume a one-factor APT model. Suppose JSC’s common stock has a factor beta of .8,
the risk-free rate is 3.2 percent, and the expected market return is 11.2 percent. What is
the expected return for JSC stock?
A. 10.25%
B. 6.40%
C. 7.20%
D. 9.60%
E. 12.16%
Answer:
You are considering a project with an initial cost of $4,300. What is the payback period
for this project if the cash inflows are $550, $970, $2,600, and $500 a year for Years 1
to 4, respectively?
A. 2.04 years
B. 2.36 years
C. 2.89 years
D. 3.04 years
E. 3.36 years
Answer:
Alexander Moore & Co. is willing to offer credit on a one-time purchase provided the
NPV of the transaction is at least $50 at a required monthly return of 2 percent. Assume
a potential sale has a sales price of $248 and a variable cost of $164. What is the
maximum probability of default that will result in an acceptable offer?
A. 32.55%
B. 29.62%
C. 11.98%
D. 10.02%
E. 18.50%
Answer:
Assuming everything else is constant, when a stock goes ex-rights the stock price
should:
A. decrease since the stockholder is losing an option.
B. increase since the corporation no longer has the right to force the stockholder to
convert.
C. remain the same since an efficient market would anticipate this change.
D. remain constant as shareholder value is unaffected by a rights offering.
E. decrease by the amount of the tax applicable to the right.
Answer:
Which one of these is a correct definition?
A. Net working capital equals current assets plus current liabilities.
B. Current liabilities are debts that must be repaid in 18 months or less.
C. Current assets are assets with short lives, such as inventory.
D. Long-term debt is defined as a residual claim on a firm’s assets.
E. Tangible assets are fixed assets such as patents.
Answer:
You bought a futures contract on corn for $3.55 per bushel and closed the contract five
days later at $3.56. The daily closing prices were: 3.57, 3.54, 3.53, 3.58, and 3.56. What
was the marked to market sequence of payments per bushel from (+) and to (-) the
clearing house?
A. +$.02, “.03, “.01, +.05, “.02
B. +$.01, “.03, “.01, +.05, “.02
C. +$.02, +.01, “.02, “.06, +.04
D. “$.02, +.03, +.01, “.05, +.02
E. “$.01, +.03, +.01, “.05, +.02
Answer:
The market price of a bond increases when the:
A. face value decreases.
B. coupon rate decreases.
C. discount rate decreases.
D. par value decreases.
E. coupon is paid annually rather than semiannually.
Answer:
The variance of returns is computed by dividing the sum of the:
A. squared deviations by the number of returns minus one.
B. average returns by the number of returns minus one.
C. average returns by the number of returns plus one.
D. squared deviations by the average rate of return.
E. squared deviations by the number of returns plus one.
Answer:
Which one of the following statements is true?
A. Bondholders are generally granted voting rights equal to those of common
shareholders.
B. Payments of both interest and dividends are tax-deductible as business expenses.
C. Unpaid common stock dividends can force a firm into liquidation.
D. Debt increases the possibility of financial distress.
E. U.S. non-financial firms tend to use more debt than equity financing.
Answer:
The complete absorption of one company by another, wherein the acquiring firm retains
its identity and the acquired firm ceases to exist as a separate entity, is called a:
A. merger.
B. consolidation.
C. tender offer.
D. spinoff.
E. divestiture.
Answer:
The carrying value or book value of assets:
A.is determined under GAAP and is based on the cost of the asset.
B.represents the true market value according to GAAP.
C.is always the best measure of the company’s value to an investor.
D.is always higher than the replacement cost of the assets.
E.is shown on the firm’s income statement.
Answer:
Which one of the following statements concerning liquidity is correct?
A.If you sold an asset today, it was a liquid asset.
B.If you can sell an asset next year at a price equal to its actual value, the asset is highly
liquid.
C.Trademarks and patents are highly liquid.
D.The less liquidity a firm has, the lower the probability the firm will encounter
financial difficulties.
E.Balance sheet accounts are listed in order of decreasing liquidity.
Answer:
A flexible short-term financial policy:
A. increases the likelihood that a firm will face financial distress.
B. incurs an opportunity cost due to the rate of return that applies to short-term assets.
C. advocates a smaller investment in net working capital than a restrictive policy does.
D. increases the probability that a firm will earn high returns on all of its assets.
E. utilizes short-term financing to fund all of the firm’s assets.
Answer:
The current ratio is measured as:
A. current assets minus current liabilities.
B. current assets divided by current liabilities.
C. current liabilities minus inventory, divided by current assets.
D. cash on hand divided by current liabilities.
E. current liabilities divided by current assets.
Answer:
Kali’s Ski Resort, Inc. stock is quite cyclical. In a boom economy, the stock is expected
to return 30 percent in comparison to 12 percent in a normal economy and a negative 20
percent in a recessionary period. The probability of a recession is 15 percent while there
is a 30 percent chance of a boom economy. The remainder of the time, the economy
will be at normal levels. What is the standard deviation of the returns?
A. 10.05%
B. 12.60%
C. 15.83%
D. 17.46%
E. 25.04%
Answer:
Indirect costs of financial distress:
A. effectively limit the amount of equity a firm issues.
B. serve as an incentive to increase the financial leverage of a firm.
C. include costs such as legal and accounting fees.
D. tend to increase as the debt-equity ratio decreases.
E. include the costs incurred by a firm as it tries to avoid seeking bankruptcy protection.
Answer:
Which one of the following statements is false?
A. An aging schedule includes only overdue accounts.
B. Aging schedules are used to monitor accounts receivable.
C. If sales are seasonal, the percentages shown on an aging schedule will vary during
the year.
D. Collection efforts may involve legal action.
E. Investments in accounts receivable equal average daily sales times average collection
period.
Answer:
Your best friend works in the finance office of the Delta Corporation. You are aware
this friend trades Delta stock based on information he overhears in the office but which
is not known to the general public. Your friend continually brags to you about the
profits he earns trading Delta stock. Based on this information, you would tend to argue
that the financial markets are at best _____ form efficient.
A. weak
B. semiweak
C. semistrong
D. strong
E. perfect
Answer:
Hi-Tech announces a major expansion which causes the price of its stock to increase
and also causes an increase in the volatility of the stock price. How will these two
market reactions affect the value of put options on Hi-Tech stock?
A. Both reactions decrease the value of the put options.
B. Both reactions increase the value of the put options.
C. Neither reaction will affect put option values.
D. The reactions will have offsetting effects on put option prices.
E. The change in volatility will not affect put option values while the increased stock
price will decrease the put option values.
Answer: