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 days. What is the weighted average
delay, the average daily receipts, and the average daily float? Assume a 30-day month.
A. 1.83 days; $16,667; $23,333
B. 1.46 days; $18,667; $27,333
C. 1.83 days; $18,447; $26,700
D. 1.46 days; $18,333; $26,700
E. 1.51 days; $18,447; $27,800
Answer:
If the covariance of Stock A with Stock B is .20, then what is the covariance of Stock B
with Stock A?
A. .20
B. .80
C. 5
D. 4
E. -1.20
Answer:
The value of a firm is maximized when the:
A. cost of equity is maximized.
B. tax rate is zero.
C. levered cost of capital is maximized.
D. weighted average cost of capital is minimized.
E. debt-equity ratio is minimized.
Answer:
The pro forma income statement for a cost reduction project:
A. will reflect a reduction in the sales of the firm.
B. will generally reflect no incremental sales.
C. has to be prepared reflecting the total sales and expenses of the entire firm.
D. cannot be prepared due to the lack of any project related sales.
E. will always reflect a negative project operating cash flow.
Answer:
The difference between an American call and a European call is that the American call:
A. has a fixed exercise price while the European exercise price can vary within a small
range.
B. is a right to buy while a European call is an obligation to buy.
C. has an expiration date while the European call does not.
D. is written on 100 shares of the underlying security while the European call covers
1,000 shares.
E. can be exercised at any time up to the expiration date while the European call can
only be exercised on the expiration date.
Answer:
Kelly Industries is given the opportunity to raise $5 million in debt for four years
through a local government subsidized program. While Kelly would normally be
required to pay 12 percent on its debt issues, the Hampton County program sets the rate
at 9 percent. What is the NPV of this subsidized loan? Ignore taxes.
A. $518,364.29
B. $296,007.41
C. $384,312.42
D. $455,602.40
E. $0
Answer:
Which one of the following is true about the use of derivatives?
A. Derivatives usually appear explicitly in the financial statements.
B. Academic surveys account for much of our knowledge of corporate derivatives use.
C. Smaller firms are more likely to use derivatives than large firms.
D. The most frequently used derivatives are commodity and equity futures.
E. Derivatives are primarily used by firms that have easy access to capital markets.
Answer:
The cash flows of a project should:
A. be computed on a pretax basis.
B. include all sunk costs and opportunity costs.
C. include all incremental and opportunity costs.
D. be applied to the year when the related expense or income is recognized by GAAP.
E. include all financing costs related to new debt acquired to finance the project.
Answer:
Which one of these statements is true?
A. The exchange markets are limited to the currencies of highly developed countries.
B. Importers and exporters are key players in the foreign exchange market.
C. The trading floor of the foreign exchange market is located in London, England.
D. Foreign exchange rates are set by the governments of each country issuing a
currency.
E. The foreign exchange market is the world’s smallest financial market.
Answer:
A mortgage banker has forward contracts to lend $12 million at 4.5 percent for 15
years. What position in Treasury bond futures does this banker need to hedge the
interest rate risk?
A. short position in 12 contracts
B. short position in 120 contracts
C. long position in 12 contracts
D. long position in 120 contracts
E. long position in 1,200 contracts
Answer:
The acronym CAPM stands for:
A. capital asset pricing model.
B. certain arbitrage pressure model.
C. current arbitrage pricing model.
D. cumulative asset pricing model.
E. capital arbitrage pricing model
Answer:
The variance of a portfolio comprised of many securities is primarily dependent upon
the:
A. variances of the securities held within the portfolio.
B. beta of the portfolio.
C. portfolio’s correlation with the market.
D. covariance between the overall portfolio and the market.
E. covariances between the individual securities.
Answer:
The behavioral finance concept of self-control is an argument in favor of:
A. frequent stock splits.
B. low cash dividends.
C. stock dividends.
D. reverse stock splits.
E. high cash dividends.
Answer:
If Corr = 0, then:
A. all error terms of companies R and T are zero.
B. the unsystematic risk of companies R and T is unrelated or uncorrelated.
C. the correlation between the returns of companies R and T is
D. the systematic risk of companies R and T is unrelated.
E. stocks R and T have no unsystematic risk.
Answer:
A par value bond offers a coupon rate of 7 percent with semiannual interest payments.
The effective annual rate provided by these bonds must be:
A. equal to 3.5 percent.
B. greater than 3.5 percent but less than 4 percent.
C. equal to 7 percent.
D. greater than 7 percent but less than 8 percent.
E. equal to 14 percent.
Answer:
The relationship between the prices of the underlying stock, a call option, a put option,
and a riskless asset is referred to as the _____ relationship.
A. put-call parity
B. covered call
C. protective put
D. straddle
E. strangle
Answer:
You own stock in a firm that has a pure discount loan due in six months. The loan has a
face value of $50,000. The assets of the firm are currently worth $62,000. The
stockholders in this firm basically own a _____ option on the assets of the firm with a
strike price of ______
A. put; $62,000.
B. put; $50,000.
C. warrant; $62,000.
D. call; $62,000.
E. call; $50,000.
Answer:
The purchase accounting method for mergers requires that:
A. the excess of the purchase price over the fair market value of the target firm be
recorded as a one-time expense on the income statement of the acquiring firm.
B. goodwill be amortized on a yearly basis.
C. the equity of the acquiring firm be reduced by the excess of the purchase price over
the fair market value of the target firm.
D. the assets of the acquired firm be recorded at their fair market value on the balance
sheet of the acquiring firm.
E. the excess amount paid for the target firm be recorded as a tangible asset on the
books of the acquiring firm.
Answer:
Assume a firm in the extraction industry has major assets consisting solely of cash,
equipment, and a closed facility but yet the firm appears to have extraordinary value.
This value is least apt to be attributable to the:
A. low exercise price held by the shareholders.
B. option to open the facility when prices rise dramatically.
C. option to keep the facility closed for an extended period of time.
D. current operating cash flow.
E. potential sale of the firm.
Answer:
The cheapest business entity to form is typically the:
A. limited liability company.
B. joint stock company.
C. general partnership.
D. limited partnership.
E. sole proprietorship.
Answer:
The total restocking cost is calculated as:
A. fixed cost per order number of orders.
B. the order size variable cost per unit.
C. carrying costs + fixed costs.
D. average inventory variable cost per unit.
E. fixed cost per unit average inventory.
Answer:
(p.$$pageTag$$) Which group of countries tends to have the highest Sharpe ratios
based on historical equity risk premiums and standard deviations of returns since 1900?
A. Italy, Japan, Belgium
B. United States, Australia, South Africa
C. Switzerland, United States, United Kingdom
D. France, Germany, Denmark
E. Belgium, Denmark, Norway
Answer:
You have taken a short position in a futures contract on corn at $3.80 per bushel. Over
the next 5 trading days the contract settled at 3.82, 3.80, 3.79, 3.77, and 3.78. You then
decide to reverse your position in the futures market on the fifth day at close. What is
the net amount you receive on this contract per bushel?
A. $3.78
B. $3.80
C. $3.82
D. $3.77
E. $3.79
Answer:
Crocket Motors has an account receivable balance of $682,400 and the average
collection period is 38 days. What are the firm’s credit sales per day?
A. $17,957.89
B. $23,333.33
C. $71,044.38
D. $259,312.00
E. $236,408.11
Answer:
A general rule for managers to follow is to set the firm’s capital structure such that the
firm’s:
A. size is maximized.
B. value is maximized.
C. bondholders are secured.
D. suppliers of raw materials are satisfied.
E. dividend payout is maximized.
Answer:
A company which uses the MACRS system of depreciation:
A. will have equal depreciation costs each year of an asset’s life.
B. will expense the largest percentage of the cost during an asset’s first year of life.
C. can depreciate the cost of land, if it so desires.
D. will write off the entire cost of an asset over the asset’s class life.
E. cannot expense any of the cost of a new asset during the first year of the asset’s life.
Answer:
The explicit and implicit costs associated with corporate default are referred to as the
_____ costs of a firm.
A. flotation
B. default beta
C. direct bankruptcy
D. indirect bankruptcy
E. financial distress
Answer:
Earnings per share will increase when:
A.depreciation decreases.
B.the number of shares outstanding increase.
C.operating income decreases.
D.dividends per share decrease.
E.the average tax rate increases.
Answer:
You are comparing Stock A to Stock B. Stock A will return 9 percent in a boom and 4
percent in a recession. Stock B will return 15 percent in a boom and lose 6 percent in a
recession. The probability of a boom is 60 percent with a 40 percent chance of a
recession. Given this information, which one of these two stocks should you prefer and
why?
A. Stock A; because it has a higher expected return and appears to be more risky than
Stock B
B. Stock A; because it has a higher expected return and appears to be less risky than
Stock B
C. Stock A; because it has a slightly lower expected return but appears to be
significantly less risky than Stock B
D. Stock B; because it has a higher expected return and appears to be just slightly more
risky than Stock A
E. Stock B; because it has a higher expected return and appears to be less risky than
Stock A
Answer:
The Cameron Co. is paying a dividend of $.82 a share today. There are 120,000 shares
outstanding with a par value of $1 per share. As a result of this dividend, the:
A. retained earnings will decrease by $120,000.
B. retained earnings will decrease by $98,400.
C. common stock account will decrease by $98,400.
D. common stock account will increase by $120,000.
E. capital in excess of par value account will decrease by $21,600.
Answer:
The return earned in an average year over a multi-year period is called the _____
average return.
A. arithmetic
B. standard
C. variant
D. geometric
E. real
Answer:
MTM Ltd. wants to earn 14.25 percent on its current investments after inflation.
Inflation is expected to average 2.8 percent over the next 5 years. What discount rate
should MTM assign to a 5-year project assuming the project has the same level of risk
as the firm’s current operations?
A. 16.96%
B. 17.05%
C. 11.14%
D. 17.45%
E. 12.09%
Answer:
With the binominal option pricing model, it is reasonable to assume:
A. there is a varying rate of price change from one time interval to the next time
interval.
B. any new information impacting prices is similar from one interval to another
interval.
C. the discount rate increases with each time interval.
D. the call price will only be usable if the time interval is extremely small.
E. that each project is limited to two outcomes over its life.
Answer:
The green shoe provision is used to:
A. cover oversubscriptions.
B. address unsold shares.
C. provide additional reward to investment bankers for a risky issue.
D. provide funding to investment bankers for unsold shares.
E. reduce the number of shareholders.
Answer:
If the corporate form of business organization has so many advantages over the sole
proprietorship, why is it so common for small businesses to initially be formed as sole
proprietorships?
Answer:
As the owner of Better Built Products, you plan to implement a system whereby
customers who pay their bills within 30 days will receive a rebate of 5 percent on their
purchases. Those who pay within 5 days will receive a rebate of 8 percent. Explain the
impact of this proposal on the firm.
Answer:
Explain in words what beta is and why it is an important tool of security valuation.
Answer:
Should investors be indifferent between two bonds which have equal market yields to
maturity as long as the bonds have the same bond rating? Can you think of any
real-world factors which might make a given investor prefer one of these bonds over
the other?
Answer:
There are generally considered to be five key factors that should be evaluated when
trying to determine if a customer will pay. Write five questions that a credit manager
should answer when reviewing a credit application that would address these factors.
Answer:
Define what is meant by interest rate risk. Assume the manager of a $100 million
portfolio of corporate bonds predicts interest rates will rise in the near future. What
adjustments should be made to the portfolio assuming the market has not already
adjusted for this prediction?
Answer:
New Tek has a sustainable growth rate of 11.2 percent. However, the firm’s managers
are determined that the firm should grow by at least 20 percent next year. What must
the firm do if the managers are to reach their desired level of growth for the firm?
Answer:
We routinely assume that investors are risk-averse return-seekers; i.e., they like returns
and dislike risk. If so, why do we contend that only systematic risk and not total risk is
important?
Answer:
Assume a project is non-scale enhancing. Describe the basic steps required to determine
the net present value of the project.
Answer:
The Direct Interactive Publishing Company is planning to raise $200 million dollars in
new capital. There are currently 50 million shares outstanding with an estimated market
price of $60 each. The corporate officers are debating whether to use a rights offering
(with or without a standby underwriting) or have the issue fully underwritten. The
company is currently listed on a regional exchange and plans to list on a national
exchange after the security issue. List and explain three advantages/disadvantages of
each issue method.
Answer:
Identify at least two accounting measures that are used in empirical asset pricing
models and explain how these measures can be used to identify assets that are expected
to have higher returns in the future.
Answer:
Discuss the adjusted present value, the flow to equity, and the weighted average cost of
capital methods of capital budgeting with leverage and the guidelines for using each
method.
Answer:
How do options apply to capital budgeting?
Answer:
Discuss the stages of venture capital financing, defining each in detail.
Answer:
Consider the following statement by a project analyst: “I analyzed my project using
scenarios for the base case, best case, and worst case. I computed breakevens and
conducted sensitivity and simulation analysis. I computed NPV, IRR, the profitability
index, and payback. In the end, I have over a hundred different estimates and am more
confused than ever. I would have been better off just sticking with my first estimate and
going by my gut instinct.” Critique this statement.
Answer:
Answer: