Derivatives can be used to either hedge or speculate. These strategies:
A. increase risk in both cases.
B. decrease risk in both cases.
C. spread or minimize risk in both cases.
D. offset risk by hedging and increase risk by speculating.
E. offset risks by speculating and increase risk by hedging.
Answer:
Stock M has a beta of 1.2. The market risk premium is 7.8 percent and the risk-free rate
is 3.6 percent. Assume you compile a portfolio equally invested in Stock M, Stock N,
and a risk-free security that has a portfolio beta equal to the overall market. What is the
expected return on the portfolio?
A. 11.2%
B. 10.8%
C. 10.4%
D. 11.4%
E. 11.7%
Answer:
Suppose that Arby’s acquired a meat packing house. This merger would be classified as
a:
A. monopolistic merger.
B. vertical merger.
C. conglomerate merger.
D. horizontal merger.
E. spin off.
Answer:
Which one of the following services is least apt to be offered to a corporation by an
investment bank?
A. formulating a method to issue new securities
B. pricing of new securities
C. facilitating a merger
D. providing checking account management
E. selling new securities
Answer:
Anna’s grandmother established a trust and deposited $250,000 into it. The trust pays a
guaranteed 4.25 percent rate of return. Anna will receive all of the interest earnings on
an annual basis and a charity will receive the principal amount at Anna’s passing. How
much income will Anna receive each year?
A. $10,000
B. $8,500
C. $12,400
D. $10,625
E. $12,750
Answer:
You wrote ten put option contracts on JIG stock with a strike price of $40 and an option
price of $.40. What is your total profit on this investment if the price of JIG is $41.05
on the option expiration date?
A. -$6,450
B. -$5,650
C. $400
D. $5,650
E. $6,450
Answer:
Kurt’s Cabinets is looking at a project that will require $80,000 in fixed assets and
another $20,000 in net working capital. The project is expected to produce sales of
$110,000 with associated costs of $70,000. The project has a 4-year life. The company
uses straight-line depreciation to a zero book value over the life of the project. The tax
rate is 35 percent. What is the operating cash flow for this project?
A. $7,000
B. $13,000
C. $27,000
D. $33,000
E. $40,000
Answer:
Sunshine Products is being liquidated. The real estate has been sold and there is a
remaining mortgage balance of $126,000 after applying the sale proceeds. The other
assets were just auctioned off and netted $418,000 after liquidation costs, wages, and
taxes. The remaining secured creditors submitted claims totaling $362,000 and the
unsecured creditor claims are $211,000. The secured creditors will receive ___ per $1
claim and the unsecured creditors will receive ___ per $1 claim.
A. $1; $.1309
B. $.98; $0
C. $1; $.1662
D. $1; $.2654
E. $1; $.0678
Answer:
You are considering purchasing stock S. This stock has an expected return of 12 percent
if the economy booms, 8 percent if the economy is normal, and 3 percent if the
economy goes into a recessionary period. The overall expected rate of return on this
stock will:
A. be equal to one-half of 8 percent if there is a 50 percent chance of an economic
boom.
B. vary inversely with the growth of the economy.
C. increase as the probability of a recession increases.
D. be independent of the probability of each economic state occurring.
E. increase as the probability of a boom economy increases.
Answer:
Global Markets wants to invest in a riskless project in Sweden. The project has an
initial cost of SKr2.3 million and is expected to produce cash inflows of SKr850,000 a
year for 3 years. The project will be worthless after the first 3 years. The expected
inflation rate in Sweden is 2.6 percent while it is 3.2 percent in the U.S. A risk-free
security is paying 5.9 percent in the U.S. The current spot rate is $1 = SKr7.45. What is
the net present value of this project in Swedish krona using the foreign currency
approach? Assume the international Fisher effect applies.
A. SKr1,856.07
B. SKr1,809.85
C. SKr1,969.10
D. SKr1,978.67
E. SKr2,028.18
Answer:
You have gathered the following market value and duration information on the Eastern
Bank:
Calculate the duration of the bank’s assets and of its liabilities.
A. 2.86 years; 1.23 years
B. 2.97 years; 1.06 years
C. 2.86 years; 1.06 years
D. 2.48 years; 1.06 years
E. 2.97 years; 1.23 years
Answer:
A year ago, you purchased 500 shares of New Tech stock at a price of $49.03 per share.
The stock pays an annual dividend of $.10 per share. Today, you sold all of your shares
for $58.14 per share. What is your total dollar return on this investment?
A. $4,755
B. $4,733
C. $4,753
D. $4,605
E. $4,853
Answer:
Given an exercise price, time to maturity, and European put-call parity, the present
value of the strike price plus the call option is equal to:
A. the current market value of the stock.
B. the present value of the stock minus a put option.
C. a put option minus the market value of the share of stock.
D. the value of a U.S. Treasury bill.
E. the share of stock plus the put option.
Answer:
What is the effective annual rate of 13.52 percent compounded continuously?
A. 14.23%
B. 13.84%
C. 13.97%
D. 14.48%
E. 14.56%
Answer:
The reorder point considers all of the following except the:
A. safety stock.
B. fixed costs per order.
C. delivery time.
D. minimum desired inventory level.
E. rate of sales.
Answer:
What is the net present value of a project with an initial cost of $36,900 and cash
inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount
rate is 13 percent.
A. −$287.22
B. −$1,195.12
C. −$1,350.49
D. $204.36
E. $797.22
Answer:
A firm is most likely experiencing financial distress when:
A. someof its cash customers begin to charge their purchases.
B. the market value of the firm’s stock declines by 10 percent in line with the market.
C. the firm’s operating cash flow is repeatedly insufficient to pay current obligations.
D. its cash distributions are eliminated and replaced with stock repurchases.
E. its accounts payable turnover rate increases.
Answer:
A convertible bond matures in 15 years, pays annual coupons, and has a coupon rate of
8 percent. The face value is $1,000 and the conversion ratio is 40. The stock currently
sells for $22.80 a share. Similar nonconvertible bonds are priced to yield 9 percent. The
value of the convertible bond is at least:
A. $835.00.
B. $919.39.
C. $1,000.00.
D. $1,070.11.
E. $912.00.
Answer:
ABC is considering acquiring XYZ and has compiled this information on XYZ:
The applicable tax rate is 30 percent and the terminal value of XYZ as of Year 3 is $2.5
million. What is PV0 of this acquisition if the discount rate is 7.1 percent?
A. $2,138,316
B. $3,309,482
C. $2,499,003
D. $3,106,048
E. $2,662,398
Answer:
When the Mexican peso is quoted as Ps13.93, this quote is a(n):
A. indirect rate.
B. direct rate.
C. cross rate.
D. triangle rate.
E. linear rate.
Answer:
A firm’s balance sheet shows $15,000 in the common stock account, $315,000 in the
capital in excess of par account, and $189,000 in the retained earnings account. The
firm just announced a 3-for-2 stock split. What will be the value of the common stock
account after the split if the par value per share is $1?
A. $10,000
B. $12,500
C. $15,000
D. $18,500
E. $22,500
Answer:
Currencies that are exchanged today without any prior arrangement are exchanged at
the:
A. spot rate.
B. forward rate.
C. triangle rate.
D. LIBOR.
E. discounted rate.
Answer:
Which one of the following is a money-market security that has no active secondary
market?
A. jumbo certificates of deposit (CD’s)
B. commercial paper
C. banker’s acceptances
D. U.S. Treasury bills
E. ordinary preferred stock
Answer:
The stated interest payment, in dollars, made on a bond each period is called the bond’s:
A. coupon.
B. face value.
C. maturity.
D. yield to maturity.
E. coupon rate.
Answer:
The market price of a stock tends to fluctuate throughout every trading day. This
fluctuation is:
A. inconsistent with the semistrong form of the efficient market hypothesis because
prices should be stable.
B. inconsistent with the weak form of the efficient market hypothesis because all past
information should already be included in the price.
C. consistent with the semistrong form of the efficient market hypothesis because daily
prices should adjust as new information becomes available.
D. consistent with the strong form of market efficiency because prices are controlled by
insiders.
E. a strong indicator that abnormal profits can be realized.
Answer:
Turner’s has $3.8 million in net working capital. The firm has fixed assets with a book
value of $48.6 million and a market value of $54.2 million. Martin amp; Sons is buying
Turner’s for $61.5 million in cash. The acquisition will be recorded using the purchase
accounting method. What is the amount of goodwill that Martin amp; Sons will record
on its balance sheet as a result of this acquisition?
A. $0
B. $3.5 million
C. $6.6 million
D. $7.2 million
E. $9.1 million
Answer:
When the officers of a firm purchase all of the equity shares and the shares of the firm
are delisted and no longer publicly available, this action is known as a(n):
A. consolidation.
B. vertical acquisition.
C. proxy contest.
D. going-private transaction.
E. equity carve-out.
Answer:
Stock market events in 1929, 1987, and 2008 are most apt to be used as examples in
support of which one of these theories?
A. blanket theory
B. advanced markets theory
C. value theory
D. bubble theory
E. behavioral theory
Answer:
Outer Wear has 12,000 shares of stock outstanding. Each share has one warrant
attached. These warrants expire today. The market value of the firm’s assets net of its
debt is $192,000. One new share can be obtained for two warrants plus $18. Assuming
all else held constant, what would you expect the market price per share to be tomorrow
morning when the stock market opens?
A. $16.67
B. $15.33
C. $16.00
D. $18.00
E. $17.50
Answer:
MJ Enterprises stock traditionally provides an average rate of return of 11.6 percent.
The firm’s next annual dividend is projected at $2.40 with future increases of 3 percent
per year. What price should you pay for this stock is you are satisfied with the firm’s
average rate of return?
A. $28.74
B. $22.50
C. $27.91
D. $28.89
E. $21.31
Answer:
The Smart Bank wants to be competitive based on quoted loan rates and thus must offer
loans at an annual percentage rate of 7.9 percent. What is the maximum rate the bank
can actually earn based on this quoted rate?
A. 7.90%
B. 8.18%
C. 8.20%
D. 8.22%
E. 8.39%
Answer: