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1) bill henricksen, purchased a put option on cycle inc. for $4. the put option has a
strike price of $40 and currently cycle inc. shares trade for $44. the expiration date of
the option is 6 months from today. what is henricksens maximum gain on his put
option?
a.$4
b.$36
c.$40
d.$44
2) an institution that raises capital by issuing liabilities against itself is a
a.financial intermediary
b.financial broker
c.financial agent
d.none of the above
3) the idea that a company may be unable to accept all projects that are expected to
have positive npvs due to the lack of funds is known as:
a.capital rationing
b.capital budgeting
c.capital constraints
d.cannibalization
e.capital structure
4) narrbegin: exhibit 22-1 liquidation
exhibit 23-1
narrend
if the company has $3,000,000 in funds to distribute to unsecured creditors, what
percentage of their claims are going to be satisfied if case i occurs?
a.100.00%
b.70.59%
c.29.41%
d.82.57%
5) in a world without distress costs or agency problems, calculate the value of bilever
co. if its perpetual ebit is expected to be $1,000,000 per year based upon total debt of
$200,000. the firms cost of debt is 5% and its required return on firms assets is 10%.
assume that bilever is in the 30% marginal tax rate.
a.$14,000,000
b.$7,000,000
c.$5,600,000
d.none of the above
6) in five years, you plan on starting graduate school to earn your mba. you know that
graduate school can be expensive and you expect you will need $15,000 per year for
tuition and other school expenses. these payments will be made at the beginning of the
school year. to have enough money to attend graduate school, you decide to start saving
today by investing in a money market fund that pays 4% apr with monthly
compounding. you will make monthly deposits into the account starting today for the
next five years. how much will you need to deposit each month to have enough savings
for graduate school? (assume that money that is not withdrawn remains in the account
during graduate school and the mba will take two years to complete.)
a.$438.15
b.$440.26
c.$442.16
d.$443.64
7) the risk that arises from the fact that mncs have to report foreign revenues and costs
in their domestic financial statements is called
a.transactions risk
b.economic risk
c.translation risk
d.political risk
8) consider the following cash flows each arriving at the end of the year. if the discount
rate is 15% , what is the (3-year) equivalent annuity ?
a.$1,935.65
b.$1,932.48
c.$1,916.62
d.$1,907.13
9) one key difference between the black and scholes (b&s) option pricing model and the
binomial model is that the b&s model assumes the ____ is known whereas the binomial
model does not.
a.current market value of the underlying asset
b.annual risk-free rate
c.strike price
d.time until expiration
e.standard deviation of the underlying asset
10) narrbegin: smith-miler merger
smith-miler merger
smith enterprises can acquire miller, inc for $250,000 in either cash or stock. both
companies are 100% equity financed. the synergy value of the acquisition for smith is
$35,000. currently smith has 25,000 shares outstanding which trade at $29 a share,
whereas miller has 15,000 shares outstanding that trade at $14 a share.
narrend
how many shares would be given to millers shareholders in a stock-financed deal?
a.10,000
b.8,621
c.17,857
d.14,478
11) the exim company has entered into a 3 month, $250 notional principal forward rate
agreement (fra) with what-a-bank. the terms are such that exim will pay what-a-bank if
libor is above 2%, but what-a-bank will pay exim if libor is below 2%. based on the
standard fra formula, who will pay and how much, if libor is 2.375% in three months?
a.exim co. pays, $1,475,614
b.exim co. pays, $232,992
c.what-a-bank pays, $1,475,614
d.what-a-bank pays, $232,992
12) strategic rationales for mergers include:
a.the ability to more closely monitor product quality
b.defensive consolidation in a mature or declining industry
c.economics of scale
d.synergy
e.all of the above
13) narrbegin: smith enterprises 2
smith enterprises 2
smith enterprises wants to conduct an ipo. the offering price of the stock is $15, the
underwriters discount is 6% and legal and other expenses are estimated to be
$1,500,000.
narrend
refer to smith enterprises 2. if the company issues 1,000,000 shares, what are the net
proceeds of the ipo?
a.$13,500,000
b.$15,000,000
c.$12,600,000
d.$10,500,000
14) narrbegin: exhibit 7-4
exhibit 7-4
narrend
given exhibit 7-4, if the expected return on the portfolio is 9.7%, what is the expected
return for security 3?
a.10%
b.11%
c.12%
d.13%
15) if the current spot exchange rate on the euro is 0.7805/$ and the one year risk free
rate for borrowing in dollars is 3% and 4% for borrowing in euros, what should be the
one year $/ forward exchange rate?
a.1.2689
b.0.7881
c.1.2936
d.0.7730
16) corporate control refers to what aspect of a corporation or business organization?
a.monitoring
b.supervision
c.direction
d.all of the above
17) big corp. anticipates issuing $5,000,000 of debt to repurchase equity. if big can
issue the debt to yield 8% per year, then what is the increase in value to big if it issues
the debt and is subject to a 34% marginal tax rate?
a.$136,000
b.$400,000
c.$1,700,000
d.none of the above
18) which of the following is a type of covenant in a private equity investment contract?
a.ownership right agreements
b.ratchet provisions
c.stock option plans
d.all of the above
19) suppose the spot exchange rate is 0.5491 pounds per u.s. dollar, while the risk-free
borrowing rates are 4% in britain and 3% in the united states. if the current forward
exchange rate is also 0.5491 pounds per dollar, what opportunity exists?
a.arbitrage by borrowing in britain today, and selling pounds forward
b.arbitrage by borrowing in britain today, and selling dollars forward
c.arbitrage by borrowing in the united states today, and selling pounds forward
d.arbitrage by borrowing in the united states today and selling dollars forward
