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 that:
A. this type of announcement generally has no effect on abnormal returns.
B. the cumulative abnormal return remains constant when this type of announcement is
made.
C. stock returns are positively, and efficiently, impacted when dividend omission
announcements are made.
D. this type of an event is incorporated into stock prices slowly over a 10-day period.
E. the cumulative abnormal return declines on the day prior to and the day of the
announcement.
Answer:
Assume the current spot rate is Can$1.362 and the one-year forward rate is Can$1.371.
The nominal risk-free rate in Canada is 6 percent while the U.S. rate is 3.5 percent.
Using covered interest arbitrage you can earn an extra profit of ___ for every $1
invested over the next year.
A. $.0018
B. $.0045
C. $.0120
D. $.0180
E. $.0240
Answer:
The Dance Studio is currently an all-equity firm that has 22,000 shares of stock
outstanding with a market price of $27 a share. The current cost of equity is 12 percent
and the tax rate is 35 percent. The firm is considering adding $225,000 of debt with a
coupon rate of 6.25 percent to its capital structure. The debt will sell at par. What will
be the levered value of the equity?
A. $325,500
B. $447,750
C. $721,250
D. $672,750
E. $594,000
Answer:
The annual annuity stream of payments with the same present value as a project’s costs
is called the project’s _____ cost.
A. incremental
B. sunk
C. opportunity
D. erosion
E. equivalent annual
Answer:
A manager should attempt to maximize the value of the firm by changing the capital
structure if and only if the value of the firm increases:
A. as a result of the change.
B. to the sole benefit of the managers.
C. to the sole benefit of the debtholders.
D. while also decreasing shareholder value.
Answer:
Cash discounts:
A. increase the amount of total credit offered.
B. increase profit margins on sales.
C. speed up the collection of receivables.
D. area means of charging lower prices to credit customers.
E. area cost-free means of increasing sales.
Answer:
The differential growth model:
A. makes allowance for one change in the discount rate.
B. uses DivT + 1 as the dividend amount throughout the formula.
C. requires g2 to be less than the discount rate.
D. assumes the second growth rate will be zero.
E. assumes the first growth rate will be zero.
Answer:
Alexandra’s is being acquired by David’s for $75,000 cash. The acquisition is being
financed internally from retained earnings. Alexandra’s currently has 3,000 shares of
stock outstanding at a price of $24 a share. David’s has 10,000 shares outstanding with a
market value of $48 a share. The acquisition will create $4,000 of synergy. What is the
value of David’s after the acquisition?
A. $556,000
B. $409,000
C. $438,000
D. $521,000
E. $481,000
Answer:
Which one of these features applies to call options but not to warrants? A. market value
that changes
A. value based on underlying asset
B. absolute minimum value of zero
C. ANSD. issued by individuals
D. exercise price
Answer:
Dilution commonly refers to the:
A. increase in stock value due to wider ownership of stock.
B. loss in existing shareholder’s value.
C. loss in new shareholder’s equity.
D. splitting of a single share of stock into multiple shares.
E. issuance of debt in order to repurchase shares.
Answer:
If a firm issues debt and includes protective covenants in the indenture then the firm’s
debt will probably be issued at _____ similar debt without thecovenants.
A. a variable interest rate rather than the fixed rate paid on
B. a lower interest rate than
C. a significantly higher interest rate than
D. an interest rate equal to that of
E. a slightly higher interest rate than
Answer:
The proposition that the value of the firm is independent of its capital structure is
called:
A. the capital asset pricing model.
B. MM Proposition I (no taxes).
C. MM Proposition II (no taxes).
D. the law of one price.
E. the efficient markets hypothesis.
Answer:
Theoretically, the NPV is the most appropriate method to determine the acceptability of
a project. A false sense of security can overcome the decision-maker when the
procedure is applied properly but the positive NPV results are accepted blindly.
Sensitivity and scenario analysis aid in the process by:
A. providing assurance that the most appropriate discount rate is being applied.
B. ensuring all estimated values are accurate.
C. ensuring the NPV value was calculated correctly.
D. providing information on a number of potential outcomes.
E. guaranteeing the NPV will be achieved.
Answer:
Assume a stock had an historical equity risk premium of 5.49 percent and a standard
deviation of 11.46 percent over the past two decades. What is the 95.4 percent range for
the equity risk premium?
A. -.18 to 9.26%
B. -.57 to 15.09%
C. .41 to 20.03%
D. -.36 to 10.62%
E. 1.08 to 22.49%
Answer:
BCD shares are currently selling for $27.38 each. You bought 200 shares one year ago
at $26.59 and received dividend payments of $1.27 per share. What was your
percentage capital gain for the year?
A. 2.97%
B. 3.21%
C. 7.75%
D. -2.89%
E. 7.52%
Answer:
Simulation analysis is based on assigning a _____ and analyzing the results.
A. narrow range of values to a single variable
B. narrow range of values to multiple variables simultaneously
C. wide range of values to a single variable
D. wide range of values to multiple variables simultaneously
E. single value to each of the variables
Answer:
Net working capital is defined as the:
A. current assets of a business.
B. difference between current assets and current liabilities.
C. present value of short-term cash flows.
D. difference between all assets and liabilities.
E. difference between total current assets and cash.
Answer:
The Sarbanes-Oxley Act requires public corporations to:
A. assess the company’s internal control structure at least quarterly.
B. distribute at least 90 percent of their profits in dividends on an annual basis.
C. list any deficiencies in internal controls.
D. file annual audit reports if the firm has “gone dark”.
E. disclose all personal loans to corporate officers or directors made after 2002.
Answer:
In a typical deal, the venture capitalist will receive at least ______ percent of the equity
of financed firm.
A. 5
B. 20
C. 40
D. 50
E. 75
Answer:
The interest rate for a tax-exempt bond that equates to the rate paid on a taxable bond is
computed as:
A. Taxable rate / (1 ” t *).
B. Tax-exempt rate (1 ” t *).
C. Taxable rate ” (1 + t *).
D. Taxable rate (1 ” t *).
E. Tax-exempt rate / (1 + t *).
Answer:
Issuing debt instead of new equity in a closely held firm is most apt to cause:
A. the owner-manager to work less hard and shirk duties.
B. the owner-manager to consume more perquisites because the cost is passed to the
debtholders.
C. both more shirking and perquisite consumption since the government provides a tax
shield on debt.
D. agency costs to fall as owner-managers do not need to worry about other
shareholders.
E. the owner-manager to reduce shirking and perquisite consumption.
Answer:
The rate most international banks charge one another for overnight Eurodollar loans is
called the:
A. Eurodollar yield to maturity.
B. London Interbank Offered Rate.
C. Paris Opening Interest Rate.
D. United States Treasury bill rate.
E. international prime rate.
Answer:
Alto and Solo are all-equity firms. Alto has 2,400 shares outstanding at a market price
of $24 a share. Solo has 4,000 shares outstanding at a price of $17 a share. Solo is
acquiring Alto for $63,000 in cash. The synergy value of the acquisition is $5,500.
What is the net present value of acquiring Alto to Solo?
A. $100
B. $400
C. $1,200
D. $2,400
E. $5,500
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 call options on Hi-Tech stock?
A. Both reactions decrease the value of the call options.
B. Both reactions increase the value of the call options.
C. Neither reaction will affect call option values.
D. The reactions will have offsetting effects on call option prices.
E. The change in volatility will not affect call option values while the increased stock
price will increase the call option values.
Answer:
The _____ premium is that portion of a nominal interest rate or bond yield that
represents compensation for expected future loss in purchasing power.
A. default risk
B. taxability
C. liquidity
D. inflation
E. interest rate risk
Answer:
You have taken a short position in a futures contract on corn at $3.74 per bushel. Over
the next 5 days (Day 1 to Day 5) the contract settled at 3.68, 3.71, 3.67, 3.64, and 3.61.
Before you can reverse your position in the futures market you are notified on Day 5 to
complete delivery. What will you receive on delivery per bushel and what is the net
amount per bushel you receive in total?
A. $3.74; -$.13
B. $3.74; $.13
C. $3.64; $3.74
D. $3.61; $3.61
E. $3.61; $3.74
Answer:
Assume the current spot rate for the Norwegian krone is $1 = NKr7.0323, the expected
inflation rate in Norway is 2.1 percent and 1.2 percent in the U.S. A risk-free asset in
the U.S. is yielding 3.7 percent. What nominal risk-free rate of return should you expect
on a Norwegian security?
A. 2.9%
B. 4.6%
C. 4.2%
D. 3.1%
E. 3.8%
Answer:
You purchased 200 shares of ABC stock on July 15th. On July 20th, you purchased
another 100 shares and then on July 22st you purchased your final 200 shares of ABC
stock. The company declared a dividend of $1.10 a share on July 5th to holders of
record on Friday, July 23rd. The dividend is payable on July 31st. How much dividend
income will you receive on July 31st from ABC?
A. $0
B. $220
C. $330
D. $440
E. $550
Answer:
A project has a contribution margin of $2.16 per unit. If the sales price per unit is $11
and the fixed costs are $24,700, what is the amount of total costs at a production level
of 6,000 units?
A. $65,165
B. $81,080
C. $57,460
D. $68,221
E. $77,740
Answer:
The DuPont identity can be computed as:
A. Net income Profit margin (1 + Debt-equity ratio).
B. Profit margin (1 / Capital intensity) (1 + Debt-equity ratio).
C. Net income Total asset turnover Equity multiplier.
D. Profit margin Total asset turnover Debt-equity ratio.
E. Return on equity Profit margin Total asset turnover.
Answer:
Kida Consultants currently has 300,000 shares of common outstanding. Firm value net
of debt is $6,900,000. Kida has warrants outstanding with an exercise price of $10.
How many warrants must the firm have issued if the gain from exercising a single
warrant is $3.25? Assume each warrant entitles its owner to one new share. A. 307,692
A. 690,000
B. 212,307
C. 380,000
D. ANSE. 900,000
Answer:
A project will increase sales by $60,000 and cash expenses by $51,000. The project will
cost $40,000 and will be depreciated using straight-line depreciation to a zero book
value over the 4-year life of the project. The company has a marginal tax rate of 35
percent. What is the operating cash flow of the project using the tax shield approach?
A. $5,850
B. $8,650
C. $9,350
D. $9,700
E. $10,350
Answer:
A convertible bond:
A. generally has fewer restrictive covenants than an otherwise identical nonconvertible
bond.
B. is generally issued with a higher coupon than a comparable non-convertible bond.
C. provides a greater benefit to its issuer than a straight bond if the underlying stock
price rises in the future.
D. retains its option value even after the bond matures.
E. is preferable to its issuer than is common stock if the stock price declines in the
future.
Answer:
The problem that results from using the overall firm’s beta in discounting projects of
differing risk levels is the:
A. acceptance of too many high-risk projects.
B. rejection of too many low risk projects.
C. rejection of too many high-risk projects.
D. acceptance of too many low risk projects.
E. acceptance of too many high-risk projects and rejection of too many low risk
projects.
Answer: