Small Town Bank has total assets with a market value of $14.23 million and a duration
of 2.64 years. The bank’s liabilities equal $12.87 million and its equity is $1.36 million
on a market value basis. To hedge interest rate risk, what duration should the bank seek
for its liabilities?
A. 2.86 years
B. 2.78 years
C. 2.39 years
D. 2.48 years
E. 2.92 years
Answer:
The risk-free rate of return is 3.68 percent and the market risk premium is 7.84 percent.
What is the expected rate of return on a stock with a beta of 1.32?
A. 9.17%
B. 9.24%
C. 13.12%
D. 14.03%
E. 14.36%
Answer:
The beta of a security is calculated as: (_____ of a security’s return with the return on
the market portfolio / _______).
A. Variance; Covariance of the market return
B. Covariance; Variance of the market return
C. Covariance; Standard deviation of the market return
D. Variance; Covariance of the security return
E. Covariance; Variance of the security return
Answer:
The call option on a dividend-paying stock compared to a comparable non-dividend
paying stock is:
A. more valuable because of the dividend payments.
B. equal in value.
C. less valuable because cash dividends lower the stock price.
D. equal to the cost of the non-dividend paying stock option.
E. either equal to or greater than the value of the non-dividend paying stock option.
Answer:
A convertible bond has an option value equal to the market value of the convertible
bond minus the:
A. straight bond value.
B. conversion value.
C. conversion premium.
D. maximum of the straight bond value or conversion value.
E. minimum of the conversion value or the straight bond value.
Answer:
A firm has a total market value of $89,600 with 6,500 shares of stock outstanding. What
will be the total market value of the firm if it does a 1-for-2 reverse stock split?
A. $179,200
B. $148,300
C. $122,300
D. $89,600
E. $44,800
Answer:
Alpha Industries is going to pay $.35, $.50, and $.80 a share over the next three years,
respectively. After that, the company has stated that the annual dividend will be $1.25
per share indefinitely. What is this stock worth today at a discount rate of 13.45
percent?
A. $6.20
B. $9.48
C. $10.88
D. $7.61
E. $5.06
Answer:
In a decision tree, caution should be used in the analysis because:
A. later stage decisions are probably riskier than earlier stages.
B. negative NPVs should never occur.
C. all real options must be included in the basic tree.
D. failure and its probability should be ignored because they are irrelevant.
E. early stage decisions are probably riskier than later stages.
Answer:
The U.S. Securities and Exchange Commission periodically charges individuals with
insider trading and claims those individuals have made unfair profits. Based on this
fact, you would tend to argue that the financial markets are at best _____ form efficient.
A. weak
B. semiweak
C. semistrong
D. strong
E. perfect
Answer:
The discounted payback method:
A. considers the time value of money.
B. discounts the cutoff point.
C. discounts the initial cost.
D. is preferred to the NPV method.
E. ignores project risks.
Answer:
The cash flow to creditors includes the firm’s cash:
A.outflow when payments are paid to suppliers.
B.outflow when new debt is acquired.
C.outflow when interest is paid on outstanding debt.
D.inflow when accounts payable increases.
E.Inflow when long-term debt is paid off.
Answer:
A firm is currently valued at $300 in a boom and $160 otherwise. The chance of a boom
is 35 percent. The firm owes $200 to its debt holders. What is the value of the firm to
the shareholders?
A. $0
B. $35.00
C. $27.50
D. $209.00
E. $9.00
Answer:
What is the amount of the net capital spending for 2015?
A.$29 million
B.$26 million
C.$337 million
D.$1,66 million
E.$285 million
Answer:
The length of time required for an investment to generate cash flows sufficient to
recover the initial cost of the investment is called the:
A. cash period.
B. net working capital period.
C. payback period.
D. profitability index.
E. discounted payback period.
Answer:
A forward contract is described as agreeing today to either purchase or sell an asset or
security:
A. at a later date at a price to be set in the future.
B. today at the current market price.
C. at a later date at a price set today.
D. if it is advantageous to do so in the future.
E. with delivery today and payment in the future.
Answer:
Cado Industries has total debt of $6,800 and a debt-equity ratio of .36. What is the value
of the total assets?
A. $18,889
B. $24,480
C. $23,520
D. $25,689
E. $25,360
Answer:
Credit default swaps:
A. have no standardized agreement template.
B. are traded on international exchanges.
C. are traded only on national exchanges.
D. are rarely used in actual practice.
E. must follow the structure outlined by the SEC.
Answer:
An option that grants the right, but not the obligation, to sell shares of the underlying
asset on a particular date at a specified price is called:
A. either an American or a European option.
B. an American call.
C. an American put.
D. a European put.
E. a European call.
Answer:
Mason’s has a 5-year, 8 percent annual coupon bond with a $1,000 par value. Dixon’s
has a 10-year, 8 percent annual coupon bond with a $1,000 par value. Both bonds
currently have a yield to maturity of 8 percent. Which one of the following statements is
correct if the market rate decreases to 7 percent?
A. Both bonds will decrease in value by 4.10 percent.
B. Mason’s bond will increase in value by $52.10.
C. Dixon’s bond will increase in value by 4.61 percent.
D. Mason’s bond will increase in value by $41.
E. Dixon’s bond will increase in value by 6.87 percent.
Answer:
What is the value of a 20-year, zero-coupon bond with a face value of $1,000 when the
market required rate of return is 9.6 percent, compounded semiannually?
A. $153.30
B. $192.40
C. $195.26
D. $168.31
E. $172.19
Answer:
Money market securities are best defined as securities:
A. purchased through a bank.
B. that are risk-free.
C. with maturities of one year or less.
D. that are purchased with cash and held until maturity.
E. that are held for one week or less.
Answer:
Costs of the firm that rise with increased levels of investment in its current assets are
called _____ costs.
A. carrying
B. shortage
C. order
D. safety
E. trading
Answer:
You are considering two independent projects that have differing requirements. Project
A has a required return of 12 percent compared to Project B’s required return of 13.5
percent. Project A costs $75,000 and has cash flows of $21,000, $49,000, and $12,000
for Years 1 to 3, respectively. Project B has an initial cost of $70,000 and cash flows of
$15,000, $18,000, and $41,000 for Years 1 to 3, respectively. Given this information,
you should:
A. accept both Project A and Project B.
B. accept Project A and reject Project B.
C. accept Project B and reject Project A.
D. reject both Project A and Project B.
E. accept whichever one you want but not both.
Answer:
The beta of debt is commonly assumed to be:
A. 1.0
B. .50
C. zero
D. “1
E. “5
Answer:
For a profitable firm, an increase in which one of the following will increase the
operating cash flow?
A. employee salaries
B. office rent
C. building maintenance
D. depreciation
E. equipment rental
Answer:
What is the value of d2 given the following information?
A. .0133
B. -.0189
C. .0460
D. .0867
E. -.0019
Answer:
The payback method of analysis:
A. discounts cash flows.
B. ignores the initial cost.
C. always uses all project cash flows.
D. applies an industry-standard recoupment period.
E. has a timing bias.
Answer:
Jamestown Ltd. currently produces boat sails and is considering expanding its
operations to include awnings. The expansion would require the use of land the firm
purchased three years ago at a cost of $142,000 that is currently valued at $137,500.
The expansion could use some equipment that is currently sitting idle if $6,700 of
modifications were made to it. The equipment originally cost $139,500 six years ago,
has a current book value of $24,700, and a current market value of $39,000. Other
capital purchases costing $780,000 will also be required. What is the amount of the
initial cash flow for this expansion project?
A. $953,400
B. $962,300
C. $948,900
D. $927,800
E. $963,200
Answer:
If a currency is selling at a discount relative to the dollar then the:
A. currency is cheaper in the spot market than it is in the forward market.
B. cross rate is cheaper than direct rate.
C. currency is cheaper in the forward market than it is in the spot market.
D. direct rate is cheaper than the indirect rate.
E. settled rate is less than the spot rate.
Answer:
What is the internal growth rate for 2015?
A. 5.83%
B. 6.24%
C. 6.15%
D. 5.18%
E. 7.70%
Answer:
Lottie’s Boutique needs to maintain 12 percent of its sales in net working capital.
Lottie’s is considering a 3-year project which will increase sales from their current level
of $110,000 to $130,000 the first year and $145,000 a year for the following two years.
When analyzing the project, what amount should be included for net working capital
for the last year if the net working capital returns to its original level at that time?
A. $1,800
B. $7,000
C. $13,200
D. $4,200
E. $17,400
Answer:
Fixed production costs are:
A. directly related to labor costs.
B. measured as costs per unit of time.
C. measured as costs per unit of output.
D. dependent on the amount of goods or services produced.
E. irrelevant when conducting sensitivity analysis.
Answer:
Arbitrage involves the simultaneous purchase:
A. of one security and the corporate repurchase of another similar security.
B. of two substitute securities with their sales following within the hour.
C. of two or more similar securities.
D. and sale of the same security.
E. and sale of different, but substitute securities.
Answer:
Matty’s Place is considering the installation of a new computer system that will cut
annual operating costs by $12,000. The system will cost $42,000 to purchase and
install. This system is expected to have a 5-year life and will be depreciated to zero
using straight-line depreciation. What is the amount of the earnings before interest and
taxes for each year of this project?
A. −$20,400
B. $5,400
C. $3,600
D. $12,000
E. $8,400
Answer: