Which of the following statements is most CORRECT?
a.A conglomerate merger is one where a firm combines with another firm in the same
industry.
b.Regulations in the United States prohibit acquiring firms from using common stock to
purchase another firm.
c.Defensive mergers are designed to make a company less vulnerable to a takeover.
d.The equity residual method values a target firm by discounting residual cash flows at
the acquiring firm’s overall cost of capital reflecting the combined firm’s post-merger
capital structure.
e.A financial merger occurs when the operations of the firms involved are integrated in
the hope of achieving synergistic benefits.
An increase in the debt ratio will generally have no effect on which of these items?
a.Business risk.
b.Total risk.
c.Financial risk.
d.Market risk.
e.The firm’s beta.
Which of the following would indicate an improvement in a company’s financial
position, holding other things constant?
a.The inventory and total assets turnover ratios both decline.
b.The total debt to total capital ratio increases.
c.The profit margin declines.
d.The times-interest-earned ratio declines.
e.The current and quick ratios both increase.
What is the bond’s conversion ratio?
a.27.14
b.28.57
c.30.00
d.31.50
e.33.08
Which of the following statements is CORRECT?
a.A stock’s beta is less relevant as a measure of risk to an investor with a
well-diversified portfolio than to an investor who holds only that one stock.
b.If an investor buys enough stocks, he or she can, through diversification, eliminate all
of the diversifiable risk inherent in owning stocks. Therefore, if a portfolio contained all
publicly traded stocks, it would be essentially riskless.
c.The required return on a firm’s common stock is, in theory, determined solely by its
market risk. If the market risk is known, and if that risk is expected to remain constant,
then no other information is required to specify the firm’s required return.
d.Portfolio diversification reduces the variability of returns (as measured by the
standard deviation) of each individual stock held in a portfolio.
e.A security’s beta measures its non-diversifiable, or market, risk relative to that of an
average stock.
Thorley Inc. is considering a project that has the following cash flow data. What is the
project’s IRR? Note that a project’s projected IRR can be less than the WACC or
negative, in both cases it will be rejected.
a.9.43%
b.9.91%
c.10.40%
d.10.92%
e.11.47%
The firm’s target capital structure should do which of the following?
a.Maximize the earnings per share (EPS).
b.Minimize the cost of debt (rd).
c.Obtain the highest possible bond rating.
d.Minimize the cost of equity (rs).
e.Minimize the weighted average cost of capital (WACC).
Which of the following statements is CORRECT?
a.Hostile takeovers are most likely to occur when a firm’s stock is selling below its
intrinsic value as a result of poor management.
b.The efficiency of the U.S. economy would probably be increased if hostile takeovers
were absolutely forbidden.
c.The managers of established, stable companies sometimes attempt to get their state
legislatures to remove rules that make it more difficult for raiders to succeed with
hostile takeovers.
d.In general, it is more in bondholders’ interests than stockholders’ interests for a firm to
shift its investment focus away from safe, stable investments and into risky
investments, especially those that primarily involve research and development.
e.Stockholders in general would be better off if managers never disclosed favorable
events and therefore caused the price of the firm’s stock to sell at a price below its
intrinsic value.
Which of the following is NOT a key element in strategic planning as it is described in
the text?
a.The mission statement.
b.The statement of the corporation’s scope.
c.The statement of cash flows.
d.The statement of corporate objectives.
e.The operating plan.
A 4-year, zero coupon Treasury bond sells at a price of $762.8952. A 3-year, zero
coupon Treasury bond sells at a price of $827.8491. Assuming the expectations theory
is correct, what does the market believe the price of 1-year, zero coupon bonds will be
in 3 years?
a.$921.54
b.$939.97
c.$958.77
d.$977.94
e.$997.50
A currency trader observes the following quotes in the spot market:
Given this information, how many yen can be purchased for 1 Swiss franc?
a.0.8505
b.0.8723
c.0.8947
d.0.9170
e.0.9400
What is the present value of the following cash flow stream at a rate of 6.25%?
a.$411.57
b.$433.23
c.$456.03
d.$480.03
e.$505.30
A firm’s CFO is considering increasing the target debt ratio, which would also increase
the company’s interest expense. New bonds would be issued and the proceeds would be
used to buy back shares of common stock. Neither total assets nor operating income
would change, but expected earnings per share (EPS) would increase. Assuming the
CFO’s estimates are correct, which of the following statements is CORRECT?
a.Since the proposed plan increases the firm’s financial risk, the stock price might fall
even if EPS increases.
b.If the plan reduces the WACC, the stock price is likely to decline.
c.Since the plan is expected to increase EPS, this implies that net income is also
expected to increase.
d.If the plan does increase the EPS, the stock price will automatically increase at the
same rate.
e.Under the plan there will be more bonds outstanding, and that will increase their
liquidity and thus lower the interest rate on the currently outstanding bonds.
Which of the following statements concerning risk management is NOT CORRECT?
a.Risk management can reduce the volatility of cash flows, and this decreases the
probability of bankruptcy.
b.Risk management makes sense for firms directly engaged in activities that involve
commodities whose values can be hedged, but it doesn’t make much sense for most
other firms.
c.Companies with volatile earnings pay more taxes than companies with more stable
earnings due to the treatment of tax credits and the rules governing corporate loss
carry-forwards and carry-backs. Therefore, our tax system encourages risk management
to stabilize earnings.
d.Risk management can reduce the likelihood of low cash flows, and therefore reduce
the probability of financial distress.
e.Risk management involves identifying events that could have adverse financial
consequences and then taking actions to prevent and/or to minimize the damage caused
by these events.
Which of the following statements is CORRECT?
a.The CAPM is an ex ante model, which means that all of the variables should be
historical values that can reasonably be projected into the future.
b.The beta coefficient used in the SML equation should reflect the expected volatility of
a given stock’s return versus the return on the market during some future period.
c.The general equation: Y = a + bX + e, is the standard form of a simple linear
regression where b = beta, and X equals the independent return on an individual
security being compared to Y, the return on the market, which is the dependent variable.
d.The rise-over-run method is not a legitimate method of estimating beta because it
measures changes in an individual security’s return regressed against time.
Which of the following statements regarding factors that affect call option prices is
CORRECT?
a.The longer the time until the call option expires the smaller its value and the smaller
its premium.
b.An option on an extremely volatile stock is worth less than one on a very stable stock.
c.The price of a call option increases as the risk-free rate increases.
d.Two call options on the same stock will have the same value even if they have
different strike prices.
e.If you observe that a put option on a stock increases in value, then a call option on
that same stock also increases in value.