The price of one country’s currency expressed in terms of another country’s currency is
called the:
A. absolute currency rate.
B. cross inflation rate.
C. depository rate.
D. exchange rate.
E. foreign interest rate.
Answer:
A merger in which an entirely new firm is created and both the acquired and acquiring
firms cease to exist is called a:
A. divestiture.
B. consolidation.
C. tender offer.
D. spinoff.
E. conglomeration.
Answer:
A stock has a market price of $25 and a standard deviation of returns of 24 percent. The
$25 call option matures in 4 months and the risk-free rate is 2.89 percent. N(d1) is .
555198 and N(d2) is .500096. What is the value of the call option per share of stock?
A. $1.71
B. $1.86
C. $1.50
D. $1.62
E. $2.16
Answer:
In a world with taxes and financial distress, when a firm is operating with the optimal
capital structure the:
A. debt-equity ratio will be less than optimal.
B. weighted average cost of capital will be maximized.
C. firm will be all-equity financed.
D. required return on assets will be at its maximum point.
E. increased benefit from additional debt is equal to the increased bankruptcy costs of
that debt.
Answer:
Filter Corp. maintains a debt-equity ratio of .45. The cost of equity is 14.7 percent, the
pretax cost of debt is 8.1 percent, and the marginal tax rate is 34 percent. What is the
weighted average cost of capital?
A. 8.38%
B. 11.02%
C. 11.80%
D. 13.00%
E. 14.12%
Answer:
A financial contract that gives its owner the right, but not the obligation, to buy or sell a
specified asset at an agreed-upon price on or before a given future date is called a(n)
_____ contract.
A. option
B. futures
C. forward
D. swap
E. straddle
Answer:
Brennan’s Boats is considering a project which will require additional inventory of
$128,000, will decrease accounts payable by $7,000, and will increase accounts
receivable by $56,000. What is the initial project cash flow needed for net working
capital?
A. $177,000
B. $184,000
C. $191,000
D. $79,000
E. $198,000
Answer:
Empirical evidence suggests that upon announcement of a seasoned equity issue,
current stock prices generally:
A. decrease perhaps because the issue reflects management’s view the stock is
overvalued.
B. remain fairly constant since an efficient market anticipates a new equity issue.
C. decrease perhaps because the issues are associated with positive NPV projects.
D. increase because the market supply is always less than demand.
E. increase because underwriters exercise their green shoe option.
Answer:
The excess return you earn by moving from a relatively risk-free investment to a risky
investment is called the:
A. geometric average return.
B. inflation premium.
C. risk premium.
D. time premium.
E. arithmetic average return.
Answer:
Event studies attempt to determine:
A. the influence of information released to the market on stock prices in days
surrounding the information’s release.
B. if the market is at least weak form efficient.
C. whether the market is semi strong or strong form efficient.
D. the correlation between the returns on two diverse securities.
E. the optimal time to release new information to the public.
Answer:
For every positive net present value project that a firm undertakes, the equity in the firm
will increase the most if the delta of the call option on the firm’s assets is:
A. equal to one.
B. between zero and one.
C. equal to zero.
D. between zero and minus one.
E. equal to minus one.
Answer:
To calculate the adjusted present value, you should:
A. multiply the additional effects of debt by the all-equity project value.
B. add the additional effects of debt to the all-equity project value.
C. divide the project’s levered cash flow by the risk-free rate.
D. divide the project’s levered cash flow by the risk-adjusted rate.
E. add the pretax cost of debt to the project’s all-equity NPV.
Answer:
Futures market transactions are commonly used to reduce risk. The most risk reduction
can be obtained when the asset at risk and the futures contract:
A. have different maturities.
B. have payoff schedules that differ.
C. have differing volatilities.
D. have uncorrelated price movements.
E. have perfectly correlated price movements.
Answer:
You are considering two insurance settlement offers. The first offer includes annual
payments of $36,000, $42,000, and $50,000 over the next three years, respectively, with
the first payment being made one year from today. The other offer is the payment of one
lump sum amount today. The relevant discount rate is 7 percent. What is the minimum
amount you should accept today if you are to select the lump sum offer?
A. $119,877.67
B. $111,144.18
C. $105,000.10
D. $118,924.27
E. $114,556.88
Answer:
KN Florals receives 72 checks per month. Of these, 48 are for $82.60, 15 are for
$71.50, and the remainder are for $40.70. The delay for the $82.60 checks is 1.8 days,
for the $71.50 checks 2.1 days, and the $40.70 checks 2.3 days. Calculate the average
daily float. Assume a 30-day month.
A. $341.05
B. $287.46
C. $309.10
D. $299.47
E. $358.02
Answer:
One of the primary weaknesses of many financial planning models is that they:
A. rely too much on financial relationships and too little on accounting relationships.
B. are iterative in nature.
C. ignore the goals and objectives of senior management.
D. ignore cash payouts to stockholders.
E. ignore the size, risk, and timing of cash flows.
Answer:
Assume you graph the costs of granting credit against the amount of credit extended.
The optimal credit amount is then determined by the point which:
A. minimizes the total cost curve.
B. maximizes the carrying costs associated with granting credit.
C. maximizes the opportunity costs associated with granting credit.
D. minimizes the carrying costs of granting credit.
E. minimizes the opportunity costs of granting credit.
Answer:
Which one of the following is true?
A. A firm with low anticipated profits will likely take on a high level of debt.
B. A successful firm will probably be all-equity financed.
C. Rational firms raise debt levels when profits are expected to decline.
D. Rational investors are likely to infer a firm is more valuable when its debt level
declines.
E. Investors will generally view an increase in debt as a positive sign for the firm’s
value.
Answer:
Pete’s Garage just purchased some equipment at a cost of $650,000. What is the proper
methodology for computing the depreciation expense for Year 3 if the equipment is
classified as 5-year property for MACRS? The MACRS rates are 20 percent, 32
percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6,
respectively.
A. $650,000 (1 − .20) (1 −.32) (1 −.192)
B. $650,000 (1 − .20) (1 −.32)
C. $650,000 (1 − .20) (1 − .32) .192)
D. $650,000 (1 −.192)
E. $650,000 .192
Answer:
Toni’s Tools is comparing machines to determine which one to purchase. The machines
sell for differing prices, have differing operating costs, differing machine lives, and will
be replaced when worn out. These machines should be compared using:
A. net present value only.
B. both net present value and the internal rate of return.
C. their equivalent annual costs.
D. the depreciation tax shield approach.
E. the replacement parts approach.
Answer:
Due to technological and market developments, the price of Beta stock has become
quite volatile. Given this, you decide to buy two one-month put option contracts and
two one-month call option contracts on this stock with an exercise price of $15. You
purchased the calls at a quoted price of $.40 and the puts at a price of $2.30. What will
be your total profit on these positions if the stock price is $29 on the day the options
expire?
A. $1,890
B. $2,720
C. $2,260
D. $1,130
E. $1,360
Answer:
Book value:
A.is equivalent to market value for firms with fixed assets.
B.is based on historical cost.
C.generally tends to exceed market value when fixed assets are included.
D.is more of a financial than an accounting valuation.
E.is adjusted to market value whenever the market value exceeds the stated book value.
Answer:
Assuming the single-factor APT model applies, the factor beta for the market portfolio
is:
A. zero.
B. one.
C. the average of the risk-free beta and the beta for the highest risk security in the
portfolio.
D. impossible to calculate without collecting sample data.
E. irrelevant to the model.
Answer:
Jessica’s Boutique has cash of $218, accounts receivable of $457, accounts payable of
$398, and inventory of $647. What is the value of the quick ratio?
A. .55
B. 1.05
C. 1.70
D. 1.32
E. 1.52
Answer:
Depreciation for a profitable firm:
A.decreases net income by less than $1 for every $1 of depreciation expense.
B.increases the net fixed assets as shown on the balance sheet.
C.reduces both the net fixed assets and the costs of a firm.
D.is a non-cash expense which increases the net operating income.
E.decreases net fixed assets, net income, and operating cash flows.
Answer:
If a firm is unlevered and has a cost of equity capital of 13.7 percent, what would be the
cost of equity if its debt-equity ratio was revised to .4? The expected cost of debt is 7.4
percent and there are no taxes.
A. 15.54%
B. 15.67%
C. 16.09%
D. 16.22%
E. 16.36%
Answer:
In a merger or acquisition, an asset should be acquired if it:
A. generates a positive net present value to the shareholders of the acquiring firm.
B. is a firm in the same line of business in which the acquirer has expertise.
C. is a firm in a totally different line of business which will diversify the firm.
D. pays a large dividend which will provide a cash pass through to the acquirer.
E. increases the firm’s market share.
Answer:
A bond that makes no coupon payments and is initially priced at a deep discount is
called a _____ bond.
A. Treasury
B. municipal
C. floating-rate
D. junk
E. zero coupon
Answer:
Assume a risk-free asset in the U.S. is currently yielding 2.7 percent while a Canadian
risk-free asset is yielding 2.8 percent and the current spot rate is Can$.8829 = $1. What
is the approximate 6-month forward rate if interest rate parity holds?
A. Can$.8833
B. Can$.8839
C. Can$.8843
D. Can$.8825
E. Can$.8850
Answer:
On May 18th, you purchased 1,000 shares of Buy Lo stock. On June 5th, you sold 200
shares of this stock for $21 a share. You sold an additional 400 shares on July 8th at a
price of $22.50 a share. The company declared a $.50 per share dividend on June 25th to
holders of record as of Thursday, July 10th. This dividend is payable on July 31st. How
much dividend income will you receive on July 31st as a result of your ownership of
Buy Lo stock?
A. $100
B. $200
C. $300
D. $400
E. $500
Answer:
Which one of the following is a correct ranking of securities based on their volatility
over the period of 1926 to 2014? Rank from highest to lowest.
A. large-company stocks, U.S. Treasury bills, long-term government bonds
B. small-company stocks, long-term corporate bonds, large-company stocks
C. long-term government bonds, long-term corporate bonds, small-company stocks
D. small-company stocks, large-company stocks, long-term corporate bonds
E. long-term corporate bonds, large-company stocks, U.S. Treasury bills
Answer:
All else constant, a coupon bond that is selling at a premium, must have:
A. a coupon rate that is equal to the yield to maturity.
B. a market price that is less than par value.
C. semi1nnual interest payments.
D. a yield to maturity that is less than the coupon rate.
E. a coupon rate that is less than the yield to maturity.
Answer:
The MM theory with taxes implies that firms should issue maximum debt. In practice,
this does not occur because:
A. debt is more risky than equity.
B. bankruptcy is a disadvantage to debt.
C. the weighted average cost of capital is inversely related to the debt-equity ratio.
D. the weighted average cost of capital is directly related to the debt-equity ratio.
E. U.S. regulations require the debt-equity ratio of publicly-traded firms to be in the
range of .3 to .7.
Answer:
The possibility that more than one discount rate will make the NPV of an investment
equal to zero presents the problem referred to as:
A. net present value profiling.
B. operational ambiguity.
C. the mutually exclusive investment decision.
D. issues of scale.
E. multiple rates of return.
Answer: