Assume the delta of a call option on a firm’s assets is .608. This means a $65,000
project will increase the value of the firm’s equity by:
A. $27,902.
B. $39,520.
C. $43,820.
D. $63,131.
E. $89,600.
Answer:
Which one of these is not a reason why executives place less value on employee stock
options than their face value would indicate?
A. The option’s value depends on the stock price exceeding the exercise price.
B. Options must be held beyond the freeze-out period.
C. Options may create a highly undiversified portfolio for the executive.
D. Options create taxable income for the executive when granted.
E. Options could be out of the money.
Answer:
The duration of a pure discount bond is:
A. equal to its half-life.
B. less than that of a comparable coupon bond.
C. independent of the bond’s maturity.
D. is equal to the bond’s maturity.
E. always equal to one year.
Answer:
Today, you purchased a futures contract obligating you to purchase 100 troy ounces of
gold for $1,220 per ounce any time over the next month. The current price of gold is
$1,218. Assume the spot price of gold falls to $1,216 tomorrow. What will be your cash
flow tomorrow for this contract?
A. “$400
B. $200
C. $0
D. “$200
E. $400
Answer:
The discounted payback rule states that you should accept an investment project if its
discounted payback period:
A. exceeds some pre-specified period of time.
B. is positive and rejected if it is negative.
C. is less than the payback period.
D. is less than some pre-specified period of time.
E. exceeds the life of the investment.
Answer:
A firm should select the capital structure which:
A. produces the highest cost of capital.
B. maximizes the value of the firm.
C. minimizes taxes.
D. is fully unlevered.
E. has no debt.
Answer:
Corporations primarily use the shelf registration method of security sales because:
A. preregistered securities can be quickly brought to market.
B. SEC registration is avoided.
C. their stock is rated as junk.
D. they are issuing securities to the general public for the first time.
E. they are doing a private offering.
Answer:
Suenette wants to own bonds but also wants their market values to remain as steady as
possible. Which type of bonds are best suited to her wishes?
A. high-coupon, short-term
B. zero-coupon, long-term
C. high-coupon, long-term
D. low-coupon, short term
E. zero coupon, short term
Answer:
Financial managers:
A. are reluctant to cut dividends.
B. tend to ignore past dividend policies.
C. tend to prefer cutting dividends every time quarterly earnings decline.
D. prefer cutting dividends over incurring flotation costs.
E. place little emphasis on dividend policy consistency.
Answer:
You would be making a wise decision if you chose to:
A. base decisions regarding investments on effective rates and base decisions regarding
loans on annual percentage rates.
B. assume all loans and investments are based on simple interest.
C. accept the loan with the lower effective annual rate rather than the loan with the
lower annual percentage rate.
D. invest in an account paying 6 percent, compounded quarterly, rather than an account
paying 6 percent, compounded monthly.
E. ignore the effective rates and concentrate on the annual percentage rates for all
transactions.
Answer:
Winslow, Inc. stock is currently selling for $40 a share. The stock has a dividend yield
of 3.8 percent. How much dividend income will you receive per year if you purchase
500 shares of this stock?
A. $152
B. $190
C. $329
D. $760
E. $1,053
Answer:
TJ’s offers a $1,000 face value, zero coupon bond with a yield to maturity of 11.3
percent, given annual compounding. The bond matures in 16 years. What is the current
price?
A. $178.78
B. $180.33
C. $188.36
D. $190.09
E. $192.18
Answer:
If the securities market is efficient, an investor need only throw darts at the stock pages
to pick securities and be just as well off as they would be with a
professionally-developed portfolio.
A. This is true because there would be no significant difference in risk and return.
B. This is true because in an efficient stock market all portfolios earn the market rate of
return.
C. This is false because professionals guarantee higher returns given the same level of
risk.
D. This is false because investors may not hold a desirable risk-return combination.
E. This is false because the markets are controlled by the institutional investors.
Answer:
Suppose that Ford and General Motors were to merge. Ignoring potential antitrust
problems, this merger would be classified as a(n):
A. horizontal merger.
B. vertical merger.
C. conglomerate merger.
D. tax inversion merger.
E. equity carve-out merger.
Answer:
A portfolio consists of Stocks A and B and has an expected return of 11.6 percent. Stock
A has an expected return of 17.8 percent while Stock B is expected to return 8.4
percent. What is the portfolio weight of Stock A?
A. 29.87%
B. 61.98%
C. 32.58%
D. 34.04%
E. 67.42%
Answer:
You purchased five CVB call option contracts with a strike price of $40 when the
option was quoted at $3.65. The option expires today when the value of CVB stock is
$43. Ignoring trading costs and taxes, what is your total profit on your investment?
A. $15
B. -$325
C. $800
D. $1,500
E. -$1,825
Answer:
Banisters is valued at $8.6 million and has debt of $2.1 million outstanding. The
unlevered firm beta is 1.72, the debt beta is zero, and the tax rate is 34 percent. What is
the levered equity beta?
A. .86
B. 1.18
C. 2.09
D. 1.98
E. 1.30
Answer:
Private workouts generally:
A. represent 75 percent of all financial restructurings.
B. lead to lower stock price increases than formal bankruptcy reorganizations.
C. exchange current financial securities for new securities.
D. are more costly than formal bankruptcies.
E. increase management salaries and provide employment guarantees.
Answer:
Which one of the following will increase net working capital? Assume the current ratio
is greater than 1.0.
A. using cash to pay an accounts payable
B. using cash to pay a long-term debt
C. selling inventory at cost
D. collecting an accounts receivable
E. using a long-term loan to buy inventory
Answer:
The current market value of the assets of Bigelow, Inc. is $91 million, with a standard
deviation of 19 percent per year. The firm has zero-coupon bonds outstanding with a
total face value of $45 million. These bonds mature in 2 years. The risk-free rate is 4
percent per year compounded continuously. What is the value of d1?
A. 3.05
B. 3.62
C. 2.48
D. 2.71
E. 3.46
Answer:
The last day on which an owner of an option can elect to exercise is the _____ date.
A. ex-payment
B. ex-option
C. opening
D. expiration
E. intrinsic
Answer:
Assuming the number of shares outstanding remains constant, an increase in dividends
per share will reduce the:
A.earnings per share.
B.addition to retained earnings.
C.net income.
D.cash flow to stockholders.
E.cash flow from assets.
Answer:
The capital gains yield plus the dividend yield on a security is called the:
A. variance of returns.
B. geometric return.
C. average period return.
D. current yield.
E. total return.
Answer:
A fraction of the available credit on a loan agreement deposited by the borrower with
the bank in a low or non-interest-bearing account is called a:
A. compensating balance.
B. cleanup loan.
C. letter of credit.
D. line of credit.
E. roll-over.
Answer:
Absolute purchasing power parity is most apt to exist for:
A. a four-door Ford vehicle.
B. a loaf of white bread.
C. a 2-bedroom home.
D. a new watch.
E. an ounce of silver.
Answer:
The specified date on which the principal amount of a bond is repaid is called the
bond’s:
A. coupon.
B. face value.
C. maturity.
D. yield to maturity.
E. coupon rate.
Answer:
Comparing the NPV profile of an investment project to that of a financing project
demonstrates why the:
A. incremental IRR varies with changes in the market rate of interest.
B. IRR decision rule for investment projects is the opposite of the rule for financing
projects.
C. life span of a project affects the decision as to which project to accept.
D. NPV rule for financing projects is the opposite of the rule for investment projects.
E. profitability index and the net present value are related.
Answer:
Which of the following methods of project analysis are biased towards short-term
projects?
A. profitability index and internal rate of return
B. discounted payback and payback
C. net present value and payback
D. payback and profitability index
E. profitability index and discounted payback
Answer:
The cash flow from a project is computed as the:
A. net operating cash flow generated by the project, less any sunk costs and erosion
costs.
B. sum of the incremental operating cash flow and aftertax salvage value of the project.
C. net income generated by the project, plus the annual depreciation expense.
D. sum of the incremental operating cash flow, capital spending, and net working
capital cash flows incurred by the project.
E. sum of the sunk costs, opportunity costs, and erosion costs of the project.
Answer:
One argument against the use of shelf-registration is:
A. that it is limited to only technology and manufacturing firms which provides those
industries with a market advantage.
B. that it provides an unfair advantage to debt issues.
C. that it unfairly increases the market price of the registered security.
D. the ability to use the dribble method in conjunction with the shelf-registration.
E. the age of the information disclosure.
Answer:
According to the Generally Accepted Accounting Principles, costs are:
A.recorded as incurred.
B.recorded when paid.
C.matched with revenues.
D.matched with production levels.
E.expensed as management desires.
Answer:
When evaluating an acquisition, you should:
A. concentrate on book values and ignore market values.
B. focus on the total cash flows of the merged firm.
C. include synergies.
D. ignore any one-time acquisition fees or transaction costs.
E. ignore any potential changes in management.
Answer:
The market’s reaction to the announcement of a change in the firm’s dividend payout is
referred to as the:
A. information content effect.
B. clientele effect.
C. efficient markets hypothesis.
D. MM Proposition I.
E. MM Proposition II.
Answer:
You bought 600 shares of stock at $24.20 each. At the end of the year, you received a
total of $720 in dividends, and your stock was worth a total of $15,678. What was your
total dollar capital gain and total dollar return?
A. $1,878; $2,598
B. $1,878; $1,158
C. $1,158; $1,878
D. $1,158; $2,598
E. $2,598; $1,878
Answer: