A global conglomerate has a debt beta of zero. If the cost of equity is 12.23 percent, and
the risk-free rate is 4.36 percent, what is the firm’s pretax cost of debt?
A. 4.36%
B. 8.30%
C. 7.87%
D. 0%
E. 12.23%
Answer:
You purchased two WXO 15 call option contracts at a quoted price of $.08. What is
your total profit on this investment if the price of WXO is $14.80 on the option
expiration date?
A. $24
B. -$16
C. $12
D. -$8
E. $20
Answer:
The changes in the relative economic conditions between countries are referred to as
the:
A. international Fisher effect.
B. international exchange rate effect.
C. translation exposure to exchange rate risk.
D. long-run exposure to exchange rate risk.
E. the interest rate parity risk.
Answer:
You desire a portfolio beta of 1.1. Currently, your portfolio consists of $100 invested in
Stock A with a beta of 1.4 and $300 in Stock B with a beta of .6. You have another $400
to invest and want to divide it between Stock C with a beta of 1.6 and a risk-free asset.
How much should you invest in the risk-free asset to obtain your desired beta?
A. $50
B. $100
C. $125
D. $350
E. $300
Answer:
Which one of the following types of securities has tended to produce the lowest real
rate of return for the period 1926 through 2014?
A. U.S. Treasury bills
B. long-term government bonds
C. small company stocks
D. large company stocks
E. long-term corporate bonds
Answer:
A project has an initial cost of $10,600 and produces cash inflows of $3,700, $4,900,
and $2,500 for Years 1 to 3, respectively. What is the discounted payback period if the
required rate of return is 7.5 percent?
A. 2.65 years
B. 2.78 years
C. 2.94 years
D. 2.88 years
E. never
Answer:
A firm has debt of $5,000, equity of $16,000, a cost of debt of 8 percent, a cost of
equity of 12 percent, and a tax rate of 34 percent. What is the firm’s weighted average
cost of capital?
A. 7.29%
B. 7.94%
C. 8.87%
D. 10.40%
E. 11.05%
Answer:
Ted, a project manager, wants to invest in a project with an initial cost of $58,500 and
cash flows of $32,400 and $38,500 in Years 1 and 2. Rosita, his boss, requires a
discount rate of 10 percent and also a return of $1.10 in today’s dollars for every $1
invested. Will Ted get his project approved? Why or why not?
A. yes; because the NPV is positive
B. yes; because the PI is greater than 1
C. yes; because both criteria are met
D. no; because the project does not meet either requirement
E. no; while the project returns more than 10 percent it does meet $1.10 per $1
requirement.
Answer:
A one-for-four reverse stock split will:
A. increase the par value by 25 percent.
B. increase the number of shares outstanding by 400 percent.
C. increase the market value but not affect the par value per share.
D. increase a $1 par value to $4.
E. increase a $1 par value by $4.
Answer:
Jeanette expects to live 30 years after she retires. At the end of the first year of her
retirement, she wants to withdraw $35,000 from her savings. Each year thereafter, she
wants to increase her annual withdrawal by 3.5 percent. If she can earn 5.5 percent on
her savings, how much does she need to have in retirement savings on the day she
retires?
A. $862,001.34
B. $648,909.18
C. $764,458.87
D. $919,028.56
E. $832,004.01
Answer:
The abnormal return in an event study is described as the:
A. total return earned on a security on the day of an announcement.
B. daily return on a security minus the daily return on the overall market.
C. average return on a security for the 7-day period surrounding an announcement.
D. average return on a security for the 7-day period surrounding an announcement
minus the average return on the security for the past year.
E. daily return on a security on the announcement date minus the risk-free rate of
return.
Answer:
The most common means of financing a temporary cash deficit is a:
A. long-term secured bank loan.
B. short-term secured bank loan.
C. short-term issue of corporate bonds.
D. long-term unsecured bank loan.
E. short-term unsecured bank loan.
Answer:
Peter’s Boats has sales of $760,000 and a profit margin of 5 percent. The annual
depreciation expense is $80,000. What is the amount of the operating cash flow if the
company has no long-term debt?
A. $34,000
B. $86,400
C. $118,000
D. $120,400
E. $123,900
Answer:
Regional Power wants to raise $2.4 million in new equity via a rights offering with a
subscription price of $12. There are currently 2.6 million shares outstanding, each with
one right. How many rights are needed to purchase one new share?
A. 12
B. 18
C. 20
D. 13
E. 6
Answer:
Wilson’s Meats has fixed costs of $.60 for every pound of meat it sells given a sales
level of 32,500 pounds. It charges $3.89 per pound of top-grade ground beef. The
variable cost per pound is $2.99. If depreciation is $16,400, what is the accounting
profit break-even point?
A. 31,948 pounds
B. 32,467 pounds
C. 39,889 pounds
D. 42,650 pounds
E. 37,338 pounds
Answer:
The Kolasinski and Li study of earnings surprises showed that:
A. prices tend to overreact and then properly adjust the following day.
B. prices tend to be unaffected by these types of announcements.
C. prices tend to adjust rapidly and efficiently to these announcements.
D. prices adjust slowly to earnings announcements.
E. earnings surprises tend to be predicted such that prices adjust prior to the
announcement.
Answer:
Northern Enterprises just purchased $1,900 of fixed assets that are classified as 3-year
MACRS property. The MACRS rates are 33.33 percent, 44.44 percent, 14.82 percent,
and 7.41 percent for Years 1 to 4, respectively. What is the amount of the depreciation
expense for Year 2?
A. $562.93
B. $633.27
C. $719.67
D. $844.36
E. $1,477.63
Answer:
The price of oil is currently at $24 but you expect it to either increase by 18 percent or
decrease by 7 percent over the next 6 months. The 6-month risk-free rate of interest is
1.98 percent. What is the probability that the price will increase?
A. 32.47%
B. 36.03%
C. 38.06%
D. 35.92%
E. 37.94%
Answer:
An inverse floater and a super-inverse floater can be more valuable to a purchaser if:
A. interest rates remain constant.
B. interest rates fall.
C. interest rates rise.
D. their maturities are shorter rather than longer.
E. capped and floored.
Answer:
The top-down approach to computing the operating cash flow:
A. ignores all noncash items.
B. applies only if a project produces sales.
C. can only be used if the entire cash flows of a firm are included.
D. is equal to Sales −Costs −Taxes + Depreciation.
E. includes the interest expense related to a project.
Answer:
The foreign currency approach to capital budgeting analysis:
A. is computationally harder to use than the home currency approach.
B. utilizes the uncovered interest parity relationship.
C. computes the NPV in both the foreign and the domestic currency.
D. is solely dependent upon purchasing power parity.
E. produces superior results as compared to the home currency approach.
Answer:
The fixed price in an option contract at which the owner can buy or sell the underlying
asset is called the option’s:
A. opening price.
B. intrinsic value.
C. strike price.
D. market price.
E. time value.
Answer:
If its yield to maturity is less than its coupon rate, a bond will sell at a _____, and
increases in market interest rates will:
A. discount; decrease this discount.
B. discount; increase this discount.
C. premium; decrease this premium.
D. premium; increase this premium.
E. premium; not affect this premium.
Answer:
The standard deviation of a portfolio will tend to increase when:
A. a risky asset in the portfolio is replaced with U.S. Treasury bills.
B. one of two stocks related to the airline industry is replaced with a third stock that is
unrelated to the airline industry.
C. the portfolio concentration in a single cyclical industry increases.
D. the weights of the various diverse securities become more evenly distributed.
E. short-term bonds are replaced with Treasury Bills.
Answer:
Firm K is planning on merging with Firm L. Firm K currently has 5,500 shares of stock
outstanding at a market price of $28 a share. Firm L has 500 shares outstanding at a
price of $16 a share. The merger will create $600 of synergy. Firm K plans to offer a
sufficient number of its shares to acquire Firm L at an acquisition cost of $8,200. How
many total shares will be outstanding in the merged firm?
A. 5,608
B. 5,792
C. 5,749
D. 5,760
E. 5,775
Answer:
New Metals has depreciation of $28,300, interest expense of $11,400, EBIT of $62,700,
a price-earnings ratio of 8.6, a profit margin of 7.2 percent, a tax rate of 34 percent, and
37,500 shares of stock outstanding. What is the market price per share?
A. $3.48
B. $5.09
C. $7.76
D. $12.48
E. $9.92
Answer:
Which one of these characteristics is least applicable to term loans?
A. avoidance of SEC registration
B. maturity in excess of five years
C. direct business loan arrangement
D. more restrictive covenants than publicly issued debt
E. lower distribution costs than a public issue
Answer:
Over the past four years, a stock produced returns of 14 percent, 22 percent, 6 percent,
and -19 percent. What is the approximate probability that an investor in this stock will
not lose more than 30 percent nor earn more than 41 percent in any one given year?
A. 84%
B. 95%
C. 68%
D. 5%
E. 34%
Answer:
A firm’s dividend payments less any net new equity raised is referred to as the firm’s:
A.operating cash flow.
B.capital spending.
C.net working capital.
D.cash flow from creditors.
E.cash flow to stockholders.
Answer:
An investment has an initial cash outflow of $210,000 for fixed assets that will be
depreciated straight-line to zero over 4 years, which is the life of the project. The sales
price is set at $19.95 a unit, the annual fixed costs of $237,000, and the variable cost per
unit is $8.87. The tax rate is 34 percent and the discount rate is 11 percent. At what sales
quantity per year will the investment break even on a financial basis?
A. 29,787 units
B. 29,143 units
C. 28,205 units
D. 28,096 units
E. 30,308 units
Answer: