The delta of a call measures the:
A. time remaining to expiration compared to the option’s original maturity.
B. change between an option’s original value and its current value.
C. swing in the price of the call relative to the swing in the underlying stock price.
D. ratio of the change in the option price to the change in the time to expiration.
E. volatility of the underlying security.
Answer:
Which one of the following would indicate a portfolio is being effectively diversified?
A. an increase in the portfolio beta
B. a decrease in the portfolio beta
C. an increase in the portfolio rate of return
D. an increase in the portfolio standard deviation
E. a decrease in the portfolio standard deviation
Answer:
A project has an initial cost of 1.2 million and expected cash inflows of 400,000,
500,000, and 600,000 for Years 1 to 3, respectively. Assume the current spot rate is .60
and the nominal returns relevant to the project are 4 percent in the U.K. and 3 percent in
the U.S. If uncovered interest rate parity exists, what is the net present value of this
project in U.S. dollars?
A. $299,087
B. $304,040
C. $301,067
D. $296,422
E. $292,009
Answer:
You are considering a 3-year job offer. The job offers an annual salary of $48,000,
$51,000, and $55,000 a year for the next three years, respectively. The offer also
includes a starting bonus of $2,500 payable immediately. What is this offer worth to
you today at a discount rate of 6.5 percent?
A. $129,640.14
B. $134,383.56
C. $132,283.56
D. $138,066.75
E. $130,983.56
Answer:
Six months ago, you purchased 100 shares of stock in ABC Co. at a price of $43.89 a
share. ABC stock pays a quarterly dividend of $.10 a share. Today, you sold all of your
shares for $45.13 per share. What is the total amount of your capital gains on this
investment?
A. $1.24
B. $1.64
C. $40.00
D. $124.00
E. $164.00
Answer:
Deep Water Mining added $411 to retained earnings last year on sales of $24,646. The
administrative expenses were $4,370, depreciation was $812, dividends paid were
$285, and the interest expense was $103. What was the cost of goods sold if the firm’s
tax rate was 35 percent?
A.$20,225
B.$24,385
C.$18,290
D.$14,815
E.$21,393
Answer:
As of the beginning of the quarter, Lester’s Market had a cash balance of $326. During
the quarter the market paid suppliers $310, collected $418 on its accounts receivables,
paid an interest payment of $32 and a tax bill of $184. In addition, the market borrowed
$80. What was the cash balance at the end of the quarter?
A. $298
B. $267
C. $255
D. $272
E. $286
Answer:
Tax shield refers to a reduction in taxes created by:
A. a reduction in sales.
B. an increase in interest expense.
C. noncash expenses.
D. a project’s incremental expenses.
E. opportunity costs.
Answer:
The lower bound on a call’s value is defined as the:
A. greater of the strike price or zero.
B. greater of the stock price minus the exercise price or zero.
C. lesser of the strike price or the stock price.
D. lesser of the strike price or zero.
E. lesser of the stock price minus the exercise price or zero.
Answer:
Sensitivity analysis:
A. is more difficult to conduct than simulation analysis.
B. provides its user with the rate of return that corresponds to the project’s IRR.
C. is affected primarily by the interrelationships between project variables.
D. indicate which variables need to be most closely monitored.
E. provides limited information and therefore is rarely used in practice.
Answer:
The information content effect implies that stock prices will rise when dividends are
increased provided that the dividend increase:
A. is denoted as a one-time event.
B. causes stockholders to increase their expectations of future cash flows.
C. is greater than the average historical dividend increase.
D. is substantial in both dollar amount and percentage terms.
E. is combined with a stock repurchase.
Answer:
The Mill Wheel is considering a 3-year project that will require $289,400 for fixed
assets, $36,700 for inventory and $27,800 for accounts receivable. Short-term debt is
expected to increase by $16,500. The fixed assets will be depreciated straight-line to a
zero book value over 5 years. At the end of the project, the fixed assets can be sold for
20 percent of their original cost and the net working capital will return to its original
level. The project is expected to generate annual sales of $275,000 and costs of
$198,000. The tax rate is 34 percent and the required rate of return is 16 percent. What
is the amount of the cash flow in the project’s final year?
A. $248,433.33
B. $237,908.18
C. $196,058.40
D. $160,087.09
E. $181,250.24
Answer:
A fully efficient market will eliminate which one of the following?
A. cyclical patterns
B. daily price fluctuations
C. unexpected price declines
D. all abnormal profits except those related to insider trading
E. price increases over any period of time in excess of six months
Answer:
A situation in which accepting one investment prevents the acceptance of another
investment is called the:
A. net present value profile.
B. operational ambiguity decision.
C. mutually exclusive investment decision.
D. issues of scale problem.
E. multiple rates of return decision.
Answer:
Your portfolio has a beta of 1.18 and consists of 15 percent U.S. Treasury bills, 30
percent Stock A, and 55 percent Stock B. Stock A has a risk level equivalent to that of
the overall market. What is the beta of Stock B?
A. .55
B. 1.10
C. 1.24
D. 1.40
E. 1.60
Answer:
Which one of the following is least apt to help convince managers to work in the best
interest of the stockholders?
A. threat of a takeover of the firm by unsatisfied stockholders
B. implementation ofa stock option plan
C. pay raises based on length of service
D. management compensation tied to the market value of the firm’s stock
E. threat of a proxy fight
Answer:
The common stock of CTI has an expected return of 14.48 percent. The return on the
market is 11.6 percent and the risk-free rate of return is 3.42 percent. What is the beta of
this stock?
A. .95
B. 1.49
C. 1.31
D. 1.42
E. 1.35
Answer:
A portfolio consists of three stocks. There are 540 shares of Stock A valued at $24.20
share, 310 shares of Stock B valued at $48.10 a share, and 200 shares of Stock C priced
at $26.50 a share. Stocks A, B, and C are expected to return 8.3 percent, 16.4 percent,
and 11.7 percent, respectively. What is the expected return on this portfolio?
A. 12.50%
B. 11.67%
C. 12.78%
D. 12.47%
E. 11.87%
Answer:
What are the values of u, the up state multiplier, and d, the down state multiplier, if
there are monthly intervals and the standard deviation is .38?
A. 1.1159; .8961
B. .0317; 1.0327
C. .0317; .9683
D. .2193; .7807
E. 1.1159; -.1159
Answer:
Deep Falls Timber stock sold for $6.50 a share as of 2015.What was the price-earnings
ratio at that time?
A. 17.12
B. 29.94
C. 12.82
D. 28.15
E. 19.64
Answer:
A stock has a rights-on price of $20, an ex-rights price of $18.25, and the number of
rights needed to buy one new share is 5. Assuming everything else is held constant,
what is the subscription price?
A. $9.50
B. $11.25
C. $16.67
D. $14.50
E. $21.90
Answer:
A derivative is a financial instrument with a value derived from a:
A. regulatory body such as the FTC.
B. primitive or underlying asset.
C. specified risk.
D. negotiated contract.
E. a probability of occurrence.
Answer:
All of the following are one of the “Five C’s of Credit” except:
A. capability.
B. capacity.
C. capital.
D. character.
E. conditions.
Answer:
The explicit costs, such as the legal expenses, associated with corporate default are
classified as _____ costs.
A. flotation
B. beta conversion
C. direct bankruptcy
D. indirect bankruptcy
E. unlevered
Answer:
U.S. Treasury bills:
A. are subject to the same risks as short-term tax exempts.
B. all have initial maturities of 90 days or less.
C. are issued for time periods as small as one week.
D. must be held to maturity and not resold.
E. are sold at weekly auctions.
Answer:
There is a 10 percent probability the economy will boom and a 20 percent probability it
will fall into a recession. Stock A is expected to return 15 percent in a boom, 9 percent
in a normal economy, and lose 14 percent in a recession. Stock B should return 10
percent in a boom, 6 percent in a normal economy, and 2 percent in a recession. Stock
C is expected to return 5 percent in a boom, 7 percent in a normal economy, and 8
percent in a recession. What is the standard deviation of a portfolio invested 20 percent
in Stock A, 30 percent in Stock B, and 50 percent in Stock C?
A. .6%
B. .9%
C. 1.8%
D. 2.2%
E. 4.9%
Answer:
Lee started a firm which he recently took public with a new stock issue of 1 million
shares. As the firm’s founder he personally owns 1.2 million shares, all of which he
owned prior to the new stock issue. The offer price of the IPO was $16 a share. The
price paid to the firm was $14.20 a share and the closing price on the IPO date was $19
a share. How much of a loss did Lee personally experience due to the IPO’s
underpricing?
A. $1.2 million
B. $2.4 million
C. $0
D. $3.6 million
E. $5.76 million
Answer:
Rosita’s Resources paid $11,310 in interest and $16,500 in dividends last year. The
times interest earned ratio is 2.9, the depreciation expense is $7,900, and the tax rate is
35 percent. What is the value of the cash coverage ratio?
A. 3.71
B. 2.58
C. 3.60
D. 2.78
E. 3.10
Answer:
The average risk premium on U.S. Treasury bills over the period of 1926 to 2014 was
_____ percent.
A. .0
B. 1.6
C. 2.2
D. 3.1
E. 3.8
Answer:
A project will produce operating cash flows of $45,000 a year for four years. During the
life of the project, inventory will be lowered by $30,000 and accounts receivable will
increase by $15,000. Accounts payable will decrease by $10,000. The project requires
the purchase of equipment at an initial cost of $120,000. The equipment will be
depreciated straight-line to a zero book value over the life of the project. The equipment
will be salvaged at the end of the project creating a $25,000 aftertax cash inflow. At the
end of the project, net working capital will return to its normal level. What is the net
present value of this project given a required return of 15 percent?
A. $23,483.48
B. $16,117.05
C. $24,909.09
D. $22,037.86
E. $19,876.02
Answer:
A public offer by one firm to directly buy the shares of another firm is called a:
A. merger.
B. consolidation.
C. tender offer.
D. spinoff.
E. divestiture.
Answer:
Wilco’s currently has a 43-day cash cycle. Assume the firm changes its operations such
that it decreases its receivables period by 2 days, increases its inventory period by 1
day, and increases its payables period by 3 days. What will the length of the cash cycle
be after these changes?
A. 38 days
B. 41 days
C. 39 days
D. 43 days
E. 45 days
Answer:
In the U.S. the principal value of a bond is most commonly:
A. $100.
B. $5,000.
C. $500.
D. $10,000.
E. $1,000.
Answer:
An option that may be exercised only on the expiration date is called a(n) _____ option.
A. European
B. American
C. Bermudan
D. futures
E. Asian
Answer: