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The delta of a call option on a firm's assets is 0.767. This means that a $50,000 project
will increase the value of equity by:
A. $21,760.
B. $25,336.
C. $38,350.
D. $54,627.
E. $65,189.
You observe that the inflation rate in the United States is 3.5 percent per year and that
T-bills currently yield 3.8 percent annually. What do you estimate the inflation rate to be
in Australia, if short-term Australian government securities yield 4.5 percent per year?
A. 4.17 percent
B. 4.20 percent
C. 4.24 percent
D. 4.27 percent
E. 4.30 percent
Which one of the following statements concerning option payoffs is correct?
A. The buyer of a call profits when the exercise price exceeds the market price.
B. The buyer of a call profits when the strike price exceeds the exercise price.
C. A put will only be exercised if both the seller and the buyer can profit.
D. Both the buyer and the seller profit when a call is exercised.
E. The seller of a put incurs a loss when a put is exercised.
The Blue Star has sales of $387,000, costs of goods sold of $259,000, average accounts
receivable of $9,800, and average accounts payable of $12,600. How long does it take
for the firm's credit customers to pay for their purchases?
A. 7.67 days
B. 8.78 days
C. 9.24 days
D. 11.88 days
E. 13.81 days
Mountain Gear can manufacture mountain climbing shoes for $14.95 per pair in
variable raw material costs and $18.46 per paid in variable labor costs. The shoes sell
for $127 per pair. Last year, production was 170,000 pairs and fixed costs were
$830,000. What is the minimum acceptable total revenue the company should accept
for a one-time order for an extra 10,000 pairs?
A. $149,500
B. $287,600
C. $334,100
D. $380,211
E. $1,164,100
Al's Sport Store has sales of $897,400, costs of goods sold of $628,300, inventory of
$208,400, and accounts receivable of $74,100. How many days, on average, does it take
the firm to sell its inventory assuming that all sales are on credit?
A. 74.19 days
B. 84.76 days
C. 121.07 days
D. 138.46 days
E. 151.21 days
The terms of sale generally include which of the following?
I. type of credit instrument
II. cash discount
III. credit period
IV. discount period
A. I and III only
B. II and IV only
C. III and IV only
D. II, III, and IV only
E. I, II, III, and IV
Which one of the following formulas expresses the absolute purchasing power parity
relationship between the U.S. dollar and the British pound?
A. S0 = PUK × PUS
B. PUS = Ft × PUK
C. PUK = S0 × PUS
D. Ft = PUS × PUK
E. S0 × Ft = PUK × PUS
You are analyzing a project and have gathered the following data:
Based on the profitability index of _____ for this project, you should _____ the project.
A. 0.93; accept
B. 1.02; accept
C. 1.07; accept
D. 0.93; reject
E. 1.07; reject
The market rate of return is 11 percent and the risk-free rate of return is 3 percent.
Lexant stock has 3 percent less systematic risk than the market and has an actual return
of 12 percent. This stock:
A. is underpriced.
B. is correctly priced.
C. will plot below the security market line.
D. will plot on the security market line.
Marshall Arts Studios just paid an annual dividend of $1.36 a share. The firm plans to
pay annual dividends of $1.40, $1.46, and $1.58 over the next 3 years, respectively.
After that time, the dividends will be held constant at $1.60 per share. What is this stock
worth today at a 9 percent discount rate?
A. $14.08
B. $14.30
C. $16.67
D. $16.79
E. $17.46
Patience is reviewing a project with projected sales of 4,200 units a year, a cash flow of
$28 a unit, and a four-year project life. Assume all operating cash flows occur on the
last day of each year. The initial cost of the project is $247,000. The relevant discount
rate is 13 percent. Patience has the option to abandon the project after two years at
which time she feels she could sell the project's assets for $110,000. At what level of
annual sales, starting in year 3, should she be willing to abandon this project?
A. 2,119 units
B. 2,355 units
C. 2,367 units
D. 2,516 units
E. 2,667 units
If a project has a net present value equal to zero, then:
A. the total of the cash inflows must equal the initial cost of the project.
B. the project earns a return exactly equal to the discount rate.
C. a decrease in the project's initial cost will cause the project to have a negative NPV.
D. any delay in receiving the projected cash inflows will cause the project to have a
positive NPV.
E. the project's PI must be also be equal to zero.
The relevant discount rate for the following set of cash flows is 14 percent. What is the
profitability index?
A. 0.89
B. 0.93
C. 0.99
D. 1.03
E. 1.07
Miller Fruit wants to expand its citrus grove operations. The firm estimates that it needs
$8.6 million to buy land and establish its operations. Currently, the firm has 540,000
shares of stock outstanding at a market price per share of $34.80. If the firm decides to
raise the needed capital through a rights offering, one right will be issued for each share
of stock. The subscription price will be set at $33 a share. How many rights will a
shareholder need to purchase one new share of stock in this offering?
A. 2.07 rights
B. 2.17 rights
C. 2.22 rights
D. 2.50 rights
E. 2.67 rights
Wear Ever is expanding and needs $12.6 million to help fund this growth. The firm
estimates it can sell new shares of stock for $32.50 a share. It also estimates it will cost
an additional $340,000 for filing and legal fees related to the stock issue. The
underwriters have agreed to a 7.5 percent spread. How many shares of stock must Wear
Ever sell if it is going to have $12.6 million available for its expansion needs?
A. 370,376 shares
B. 419,127 shares
C. 430,437 shares
D. 454,209 shares
E. 461,806 shares
Bonnie's Ice Cream is expecting its ice cream sales to decline due to the increased
interest in healthy eating. Thus, the company has announced that it will be reducing its
annual dividend by 2 percent a year for the next five years. After that, it will maintain a
constant dividend of $2 a share. Last year, the company paid $2.20 per share. What is
this stock worth to you if you require a 9.5 percent rate of return?
A. $16.21
B. $17.48
C. $18.64
D. $19.09
E. $21.36
Assume that an item costs $100 in the U.S. and the exchange rate between the U.S. and
Canada is: $1 = C$1.27. Which one of the following concepts supports the idea that the
item that sells for $100 in the U.S. is currently selling in Canada for $127?
A. unbiased forward rates condition
B. uncovered interest rate parity
C. international Fisher effect
D. purchasing power parity
E. interest rate parity
The degree of operating leverage is equal to:
A. the percentage change in quantity divided by the percentage change in OCF.
B. the percentage change in sales divided by the percentage change in OCF.
C. 1 + FC/OCF.
D. 1 + VC/OCF.
E. 1 - (FC + VC)/OCF.
Which of the following should a financial manager consider when analyzing a capital
budgeting project?
I. project start up costs
II. timing of all projected cash flows
III. dependability of future cash flows
IV. dollar amount of each projected cash flow
A. I and IV only
B. I, II, and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
Assume the total cost of a college education will be $300,000 when your child enters
college in 16 years. You presently have $75,561 to invest. What rate of interest must
you earn on your investment to cover the cost of your child's college education?
A. 7.75 percent
B. 8.50 percent
C. 9.00 percent
D. 9.25 percent
E. 9.50 percent
Which one of the following types of analysis is the most complex to conduct?
A. scenario
B. break-even
C. sensitivity
D. degree of operating leverage
E. simulation
Amy just purchased a right to buy 100 shares of LKL stock for $35 a share on June 20,
2009. Which one of the following did Amy purchase?
A. American delta
B. American call
C. American put
D. European put
E. European call
Which of the following statements is correct?
A. A firm has a greater likelihood of needing an unexpected loan when its cash flows
are relatively constant over time.
B. The cost of borrowing affects the target cash balance of a firm.
C. Management's desire to maintain a low cash balance has no effect on the borrowing
needs of a firm.
D. The target cash balance increases as the interest rate rises.
E. The target cash balance decreases as the order costs increase.
The Walthers Company has a semi-annual coupon bond outstanding. An increase in the
market rate of interest will have which one of the following effects on this bond?
A. increase the coupon rate
B. decrease the coupon rate
C. increase the market price
D. decrease the market price
E. increase the time period
This morning, Krystal purchased shares of Global Markets stock at a cost of $39.40 per
share. She simultaneously purchased puts on Global Markets stock at a cost of $1.25
per share and a strike price of $40 per share. The put expires in one year. How much
profit will she earn per share on these transactions if the stock is worth $38 a share one
year from now?
A. -$2.65
B. -$1.25
C. -$0.65
D. $0.60
E. $1.25
If a firm does not expect to owe taxes for a few years and needs some equipment, the
firm should:
A. lease the equipment and retain the tax benefits.
B. lease the equipment with the lessor retaining the tax ownership of the asset.
C. borrow the money to buy the asset and then depreciate it using MACRS
depreciation.
D. buy the equipment with cash and depreciate it using MACRS.
E. buy the equipment and depreciate it straight-line over the life of the asset.
Decline, Inc. is trying to determine its cost of debt. The firm has a debt issue
outstanding with 15 years to maturity that is quoted at 107 percent of face value. The
issue makes semiannual payments and has an embedded cost of 11 percent annually.
What is the aftertax cost of debt if the tax rate is 33 percent?
A. 6.76 percent
B. 6.90 percent
C. 7.17 percent
D. 7.37 percent
E. 7.42 percent
The break-even tax rate between a taxable corporate bond yielding 7 percent and a
comparable nontaxable municipal bond yielding 5 percent can be expressed as:
A. 0.05/(1 - t*) = 0.07.
B. 0.05 - (1 - t*) = 0.07.
C. 0.07 + (1 - t*) = 0.05.
D. 0.05 × (1 - t*) = 0.07.
E. 0.05 × (1 + t*) = 0.07.
The value of a call option delta is best defined as:
A. between zero and one.
B. less than zero.
C. greater than zero.
D. greater than or equal to zero.
E. greater than one.
A 2/10, net 30 credit policy:
A. is an expensive form of short-term credit if a buyer foregoes the discount.
B. provides cheap financing to the buyer for 30 days.
C. is an inexpensive means of reducing the seller's collection period if every customer
takes the discount.
D. tends to have little effect on the seller's collection period.
E. tends to increase a firm's investment in receivables as compared to a straight net 30
policy.
Which one of the following states that the value of a firm is unrelated to the firm's
capital structure?
A. Capital Asset Pricing Model
B. M&M Proposition I
C. M&M Proposition II
D. Law of One Price
E. Efficient Markets Hypothesis
