Individuals that continually monitor the financial markets seeking mispriced securities:
A. tend to make substantial profits on a daily basis.
B. tend to make the markets more efficient.
C. are never able to find a security that is temporarily mispriced.
D. are always quite successful using only well-known public information as their basis
of evaluation.
E. are always quite successful using only historical price information as their basis of
evaluation.
Answer:
The dirty price of a bond is defined as the:
A. market price minus any taxes due on the accrued interest.
B. market price minus the accrued interest.
C. clean price minus the accrued interest.
D. quoted price plus the accrued interest.
E. clean price minus any taxes due on the accrued interest.
Answer:
You own one call option with an exercise price of $30 on Nadia stock. This stock is
currently selling for $27.80 a share but is expected to increase to either $28 or $34 a
share over the next year. The risk-free rate of return is 5 percent. What is the current per
share value of your option if it expires in one year?
A. $.75
B. $.79
C. $.89
D. $.92
E. $.95
Answer:
Indirect costs of bankruptcy are born principally by:
A. bondholders.
B. stockholders.
C. managers.
D. the federal government.
E. the firm’s suppliers.
Answer:
Chapter 11 of the Federal Bankruptcy Reform Act of 1978:
A. was replaced by Section 363 in 2009.
B. was expanded to allow liquidations in 2010 as a result of the financial crisis of 2008.
C. underwent a major revision in 2011.
D. was amended in 2005 by the Bankruptcy Abuse Prevention and Consumer Protection
Act.
E. has never been revised or amended.
Answer:
The excess return earned by an asset that has a beta of 1.0 over that earned by a
risk-free asset is referred to as the:
A. market rate of return.
B. market risk premium.
C. systematic return.
D. total return.
E. real rate of return.
Answer:
When calculating the weighted average flotation cost, the weights should be based on
the:
A. mix of debt and equity that will be used to finance the specific project.
B. firm’s target capital structure.
C. percentages of internal and external financing that will be used for the project.
D. firm’s current mix of debt and equity.
E. average amounts of external capital raised during the past twelve months.
Answer:
A firm has a debt-equity ratio of .57, and unlevered cost of equity of 14 percent, a
levered cost of equity of 15.6 percent, and a tax rate of 34 percent. What is the cost of
debt?
A. 11.25%
B. 10.50%
C. 9.75%
D. 11.00%
E. 10.33%
Answer:
The camera you want to buy costs $399 in the U.S. If absolute purchasing power parity
exists, the identical camera will cost _____ in Australia if the exchange rate is A$1 =
$.8526.
A. A$340.19
B. A$393.23
C. A$435.09
D. A$467.98
E. A$506.67
Answer:
The internal rate of return tends to be:
A. easier for managers to comprehend than the net present value.
B. extremely accurate even when cash flow estimates are faulty.
C. ignored by most financial managers.
D. used primarily to differentiate between mutually exclusive projects.
E. utilized in project analysis only when multiple net present values apply.
Answer:
The constant dividend growth model:
A. is more complex than the differential growth model.
B. requires the growth period be limited to a set number of years.
C. is never used because firms rarely attempt to maintain steady dividend growth.
D. can be used to compute a stock price at any point in time.
E. most applies to stocks with differential growth rates.
Answer:
Which one of the following is not included as an input for the Black Scholes option
pricing model?
A. standard deviation
B. time to maturity
C. exercise price
D. par value
E. risk-free interest rate
Answer:
The adjusted present value method (APV), the flow to equity (FTE) method, and the
weighted average cost of capital (WACC) method produce equivalent results, but each
can have difficulties making computation impossible at times. Given this, which one of
these is a correct statement?
A. The WACC method is preferred when evaluating a leveraged buyout.
B. The APV method is the most commonly used method in actual practice.
C. Use the FTE method when the level of debt is known over a project’s life.
D. Use the WACC method when the level of debt is known over a project’s life.
E. The WACC method is appropriate when the target debt-to-value ratio applies over a
project’s life.
Answer:
Financial economists prefer to use market values rather than book values when
measuring debt ratios because market values are:
A. more stable than book values.
B. a better reflection of current information.
C. net of taxes.
D. used by Standard amp; Poor’s to measure credit worthiness.
E. required by financial regulators.
Answer:
Assume it requires 3 rights to obtain a new share in a rights offering. If the stock’s price
prior to the ex-rights date is $25 and the ex-rights price is $22.75, what is the value of
each right?
A. $.67
B. $.75
C. $.56
D. $.60
E. $.72
Answer:
An investment project has an initial cost of $260 and cash flows $75, $105, $100, and
$50 for Years 1 to 4, respectively. The cost of capital is 12 percent. What is the
discounted payback period?
A. 3.76 years
B. never
C. 3.42 years
D. 3.68 years
E. 3.92 years
Answer:
Two years ago, the Fun Center deposited $3,200 in an investment account for the
purpose of buying new equipment three years from today. Today, it is adding another
$5,000 to this account. It plans on making a final deposit of $3,500 to the account next
year. How much will be available when it is ready to buy the equipment, assuming the
account earns a rate of return of 6.85 percent?
A. $13,619.29
B. $13,430.84
C. $12,746.17
D. $14,194.54
E. $14,552.21
Answer:
Cassandra’s has 6,100 shares outstanding at a market price per share of $24. Adrian’s
has 3,500 shares outstanding at a market price of $56 a share. Neither firm has any debt.
Adrian’s is acquiring Cassandra’s for $155,000 in cash. The synergy of the acquisition is
$22,500. What is the value of Cassandra’s to Adrian’s?
A. $155,000
B. $132,500
C. $168,900
D. $158,200
E. $146,400
Answer:
A swap is an arrangement for two counterparties to:
A. exchange cash flows over time.
B. permit fluctuation in interest rates.
C. help exchange markets clear.
D. temporarily exchange fixed assets.
E. insure natural catastrophes.
Answer:
The date on which the firm mails out its declared dividends is called the:
A. ex-rights date.
B. ex-dividend date.
C. date of record.
D. date of payment.
E. declaration date.
Answer:
Smith and Johnson have expected sales of $2,380, $2,840, $4,430, and $4,480 for the
months of January through April, respectively. The accounts receivable period is 15
days. How much did the firm collect in the month of March? Assume a 30-day month.
A. $2,215
B. $4,160
C. $3,635
D. $3,430
E. $1,420
Answer:
Assume you are using the dividend growth model to value stocks. If you expect the
market rate of return to increase across the board on all equity securities, then you
should also expect the:
A. market values of all stocks to increase.
B. market values of all stocks to remain constant as the dividend growth will offset the
increase in the market rate.
C. market values of all stocks to decrease.
D. stocks that do not pay dividends to decrease in price while the dividend-paying
stocks maintain a constant price.
E. dividend growth rates to increase to offset this change.
Answer:
One intent of the Sarbanes Oxley Act of 2002 is to:
A. prevent minority investors from making demands on corporations.
B. protect corporate directors from frivolous lawsuits.
C. guarantee the repayment of all future personal loans to corporate officers and
directors.
D. protect investors from corporate abuses.
E. require all public corporations to “go dark” within the next 20 years.
Answer:
Flexible short-term financial policies tend to:
A. maintain low accounts receivable balances.
B. support few investments in marketable securities.
C. minimize the investment in inventory.
D. maintain large cash balances.
E. tightly restrict credit sales.
Answer:
The rate of return on the common stock of Flowers by Flo is expected to be 14 percent
in a boom economy, 8 percent in a normal economy, and only 2 percent in a
recessionary economy. The probabilities of these economic states are 20 percent for a
boom, 70 percent for a normal economy, and 10 percent for a recession. What is the
variance of the returns?
A. .001044
B. .001280
C. .001863
D. .002001
E. .002471
Answer:
The measure of beta associates most closely with:
A. idiosyncratic risk.
B. the risk-free return.
C. systematic risk.
D. unexpected risk.
E. unsystematic risk.
Answer:
The Mini-Max Company has a new prospective 5-year project with an initial cost of
$318,900, annual fixed costs of $45,200, variable costs per unit of $16.78, and a sales
price of $29.95. The discount rate is 13 percent and the tax rate is 35 percent. The firm
uses straight-line depreciation over a project’s life for all fixed assets. What is the
accounting break-even point in units per year?
A. 7,850
B. 8,275
C. 10,315
D. 11,304
E. 11,429
Answer:
Assume a leveraged firm plans to raise new capital to finance a project. To properly
account for the flotation costs, the firm should:
A. subtract the pretax flotation cost from the project’s NPV.
B. deduct the amount of the flotation cost from the cash flows for Year 1 of the project.
C. add the percentage of the flotation cost to the WACC when discounting the cash
flows.
D. divide the amount of project capital needed by (1 ” Weighted average flotation cost).
E. increase the target weights of both debt and equity to account for the flotation
percentage.
Answer:
The expected return on a portfolio:
A. can be greater than the expected return on the best performing security in the
portfolio.
B. can be less than the expected return on the worst performing security in the portfolio.
C. is independent of the performance of the overall economy.
D. is limited by the returns on the individual securities within the portfolio.
E. is an arithmetic average of the returns of the individual securities when the weights
of those securities are unequal.
Answer:
Checks written by the firm are said to generate ___ float.
A. collection
B. ledger
C. disbursement
D. book
E. accounting
Answer:
Flo’s Flowers has a project costing $40,000 and cash flows of $8,500, $15,600, and
$22,700 for Years 1 to 3, respectively. Based on the profitability index rule, should the
project be accepted if the discount rate is 9.5 percent? Why or why not?
A. Yes; because the PI is 1.03
B. Yes; because the PI is .95
C. Yes; because the PI is negative
D. No; because the PI is 1.03
E. No; because the PI is .95
Answer:
You are trying to determine whether to accept Project A or Project B. These projects are
mutually exclusive. As part of your analysis, you should compute the incremental IRR
by determining the:
A. internal rate of return for the cash flows of each project.
B. net present value of each project using the internal rate of return as the discount rate.
C. discount rate that equates the discounted payback periods for each project.
D. discount rate that makes the net present value of each project equal to one.
E. internal rate of return for the differences in the cash flows of the two projects.
Answer:
Financial planning, when properly executed:
A. ignores the normal restraints encountered by a firm.
B. is based on the internal rate of growth.
C. reduces the necessity of daily management oversight of the business operations.
D. ensures internal consistency among the firm’s various goals.
E. eliminates the need to plan more than one year in advance.
Answer:
A _____ is an alternative method to cash dividends which is used to pay out a firm’s
earnings to shareholders.
A. merger
B. acquisition
C. payment-in-kind
D. stock split
E. share repurchase
Answer: