You recently purchased a stock that is expected to earn 12.6 percent in a booming
economy, 8.9 percent in a normal economy and lose 5.2 percent in a recessionary
economy. Each economic state is equally likely to occur. What is your expected rate of
return on this stock?
A. 6.47%
B. 8.90%
C. 5.43%
D. 7.65%
E. 7.01%
Answer:
The market risk premium is computed by:
A. adding the risk-free rate of return to the inflation rate.
B. adding the risk-free rate of return to the market rate of return.
C. subtracting the risk-free rate of return from the inflation rate.
D. subtracting the risk-free rate of return from the market rate of return.
E. multiplying the risk-free rate of return by the market beta.
Answer:
Looper Industries bonds have a face value of $1,000 and can be exchanged for 30
shares of stock. The stock is selling for $35 a share. Looper has an outstanding call
option on the bonds at $1,040. What should be the current market value of one of these
bonds if the option premium per bond is $15? Assume the bond coupon rate equals the
market rate of interest. A. $1,040
A. ANSB. $1,065
B. $1,025
C. $1,030
D. $1,035
Answer:
The net working capital of a firm will decrease if there is:
A. a decrease in accounts payable.
B. an increase in inventory.
C. a decrease in accounts receivable.
D. an increase in the firm’s checking account balance.
E. a decrease in fixed assets.
Answer:
A firm has a debt-equity ratio of 1, a cost of equity of 16 percent, and a cost of debt of 8
percent. If there are no taxes or other imperfections, what is its unlevered cost of
equity?
A. 8%
B. 10%
C. 12%
D. 14%
E. 16%
Answer:
Risk that affects a large number of assets, each to a greater or lesser degree, is called
_____ risk.
A. idiosyncratic
B. diversifiable
C. systematic
D. asset-specific
E. total
Answer:
The value of a target firm to the acquiring firm is equal to the:
A. value of the target firm as a separate entity plus the synergy derived from the
acquisition.
B. purchase cost of the target firm.
C. value of the merged firm minus the value of the target firm as a separate entity.
D. purchase cost plus the incremental value derived from the acquisition.
E. incremental value derived from the acquisition.
Answer:
The approach that further attempts to model real world uncertainty by analyzing
projects the way one might analyze gambling strategies is called:
A. gambler’s approach.
B. blackjack approach.
C. Monte Carlo simulation.
D. scenario analysis.
E. sensitivity analysis.
Answer:
A $25 investment returns $27.50 at the end of one year with no risk. Given this, you
know that the NPV:
A. is zero at any given discount rate.
B. is negative if the required return is less than 10 percent.
C. equals 1.0 if the required return is 10 percent.
D. is zero if the required return is equal to 10 percent.
E. must be positive at any given discount rate.
Answer:
All else equal, the payback period for a project will decrease whenever the:
A. initial cost increases.
B. required return for a project increases.
C. assigned discount rate decreases.
D. cash inflows are moved earlier in time.
E. duration of a project is lengthened.
Answer:
The term maturity hedging refers to:
A. staggering debt so the total amount due remains relatively constant.
B. adjusting all financing to match the lowest available interest rates.
C. increasing financing when interest rates decline and lowering financing when rates
increase.
D. matching the life of an asset with the life of the asset’s financing.
E. creating a financial package that has one loan maturing each year over a stated
number of years.
Answer:
New World has a beginning cash balance of $536 on February 1st. The firm has
projected sales of $660 in January, $810 in February and $890 in March. The cost of
goods sold is equal to 70 percent of sales. Goods are purchased one month prior to the
month of sale. The accounts payable period is 30 days and the accounts receivable
period is 15 days. The firm has monthly cash expenses of $225. What is the projected
ending cash balance at the end of February? Assume 30-day months.
A. $437
B. $502
C. $479
D. $423
E. $486
Answer:
Young’s had a beginning accounts payable balance of $42,900 and an ending accounts
payable balance of $44,800. Sales for the period were $770,000 and costs of goods sold
were $598,000. If the operating cycle is 129 days, how long is the firm’s cash cycle?
A. 102.24 days
B. 79.35 days
C. 97.13 days
D. 81.19 days
E. 107.78 days
Answer:
A levered firm is a company that has:
A. accounts payable as its only liability.
B. some debt in its capital structure.
C. an all-equity capital structure.
D. a tax loss carry forward.
E. taxable income.
Answer:
There are 3 directors’ seats up for election. If you own 1,000 shares of stock and you
can vote 1,000 votes in each of the three elections, then the firm uses the voting
procedures referred to as:
A. cumulative voting.
B. absolute priority voting.
C. sequential voting.
D. straight voting.
E. market share voting.
Answer:
Which one of these terms refers to the firm’s interest payments less any net new
borrowing?
A.operating cash flow
B.capital spending
C.net working capital
D.cash flow to stockholders
E.cash flow to creditors
Answer:
You are the beneficiary of a life insurance policy. The insurance company offers two
options for receiving the proceeds: a lump sum of $50,000 today or payments of $550 a
month for ten years. If you can earn 6 percent, compounded monthly, which option
should you take and why?
A. You should accept the lump sum because the payments are only worth $49,540.40
today.
B. You should accept the payments because they are worth $51,523.74 today.
C. You should accept the payments because they are worth $53,737.08 today.
D. You should accept the $50,000 because the payments are only worth $49,757.69
today.
E. You should accept the $50,000 because the payments are only worth $48,808.17
today.
Answer:
Monte Carlo simulation is:
A. the method of analysis most widely used by executives.
B. a very simple formula.
C. more complex than sensitivity or scenario analysis.
D. the oldest capital budgeting technique.
E. most commonly applied to small, short-term projects.
Answer:
The binomial option pricing model is:
A. bell-curve shaped.
B. symmetrical.
C. hyperbolic.
D. asymmetric.
E. curvilinear.
Answer:
Kurt’s Interiors has annual revenue of $506,000 with costs of $369,400.Depreciation is
$64,900 and the tax rate is 34 percent. The firm has debt outstanding with a market
value of $240,000 along with 7,500 shares of stock that is valued at $87 a share. The
firm has $51,200 of cash, all of which is needed to run the business.What is the firm’s
EV/EBITDA ratio?
A. 6.37
B. 6.53
C. 5.39
D. 6.15
E. 6.28
Answer:
The government imposed a fine on the Not-So-Legal Company. The fine calls for a
payment of $100,000 today, $150,000 one year from today, and $200,000 two years
from today. The government will hold the funds until the final payment is collected and
then donate the entire amount to charity. The government has agreed to pay annual
interest of 3 percent on the held funds. How much will be donated to charity in two
years?
A. $475,000.00
B. $460,590.00
C. $447,174.76
D. $451,050.05
E. $474,407.70
Answer:
Systematic risk is defined as:
A. a risk that specifically affects a single asset or small group of assets.
B. any risk that affects a large number of assets.
C. any risk that has a huge impact on the return of a security.
D. the random component of return.
E. any risk that can be reasonably expected over a short-term period.
Answer:
The expected inflation rate in Finland is 2 percent while it is 4 percent in the U.S. A
risk-free asset in the U.S. is yielding 5.5 percent. What nominal rate of return should
you expect on a risk-free Finnish security?
A. 2.0%
B. 2.5%
C. 3.0%
D. 3.5%
E. 4.0%
Answer:
If an acquisition does not create value, then the:
A. earnings per share of the acquiring firm must be the same both before and after the
acquisition.
B. earnings per share can change but the stock price of the acquiring company should
remain constant.
C. price per share of the acquiring company should increase because of the growth of
the firm.
D. earnings per share will most likely increase while the price-earnings ratio remains
constant.
E. price-earnings ratio should remain constant regardless of any changes in the earnings
per share.
Answer:
Green Shoe options generally last ____ days and benefit ____.
A. 30; the issuer
B. 30; the underwriting syndicate
C. 60 days; the underwriting syndicate
D. 60 days; the issuer
E. 90 days; both the issuer and the underwriting syndicate
Answer:
For the acquiring firm, diversification:
A. will automatically produce gains.
B. will reduce both risk and debt capacity.
C. may provide financial benefits.
D. will provide risk reduction for all shareholders’ portfolios.
E. may result in a risk-free firm.
Answer:
A cash payment made by a firm to its owners when some of the firm’s assets are sold
off is called a:
A. liquidating dividend.
B. regular cash dividend.
C. special dividend.
D. extra cash dividend.
E. share repurchase.
Answer:
Wybro’s Markets has sales of $684,000, costs of $437,000, interest paid of $13,800,
total assets of $712,000, and depreciation of $109,400. The tax rate is 35 percent and
the equity multiplier is 1.6. What is the return on equity?
A. 11.30%
B. 13.92%
C. 7.06%
D. 15.48%
E. 18.08%
Answer:
Thecost of equity for an all-equity firm is designated as:
A. Rs
B. RD
C. RS(1 ” tC)
D. R0
E. R0(1 ” tC)
Answer:
The WACC approach to valuation is not as useful as the APV approach in leveraged
buyouts because:
A. there is greater risk with a LBO.
B. the future reductions in debt are known at the time of the LBO.
C. there is no interest tax shield with the WACC.
D. the value of the levered and unlevered firms are equal in an LBO.
E. WACC only applies to unlevered projects.
Answer:
The Rent It Company declared a dividend of $.60 a share on October 20th to holders of
record on Monday, November 1st. The dividend is payable on December 1st. You
purchased 100 shares of this stock on Wednesday, October 27th. How much dividend
income will you receive on December 1st from the Rent It Company?
A. $0
B. $1.50
C. $6.00
D. $15.00
E. $60.00
Answer:
Which of these are squared values?
A. variance, correlation, and covariance
B. variance and beta
C. covariance and variance
D. correlation, beta, variance
E. covariance and correlation
Answer:
If a firm is currently profitable, then:
A. its current cash inflows must exceed its current cash outflows.
B. its reported sales exceed its costs.
C. its cash flows are known with certainty.
D. it will always have sufficient cash to pay its bills in a timely manner.
E. the timing of the cash flows on proposed projects is irrelevant.
Answer:
Uptown Markets recently did an analysis of its credit policy and considered several
different options. Once the analysis was completed and reviewed, the firm adopted the
most optimal policy. The president then stated: “Now, that’s done. So we don”t ever
have to go through that process again.”Do you agree?
Answer:
Explain liquidity risk, default risk, and taxability risk. How does each of these risks
affect the yield of a bond?
Answer:
There are a number of ways firms can deal with financial distress. Identify at least 5 of
these.
Answer:
Describe the three basic legal procedures that one firm can use to acquire another and
briefly discuss the advantages and disadvantages of each.
Answer:
Explain why credit default swaps act like an insurance policy.
Answer:
Why is interest expense excluded from the operating cash flow calculation?
Answer:
How well do you think relative purchasing power parity and uncovered interest parity
behave? That is, do you think it’s possible to forecast the expected future spot exchange
rate accurately? What complications might you run into?
Answer:
What should be the primary goal of the financial manager of a corporation? Why?
Answer:
List and briefly describe the three basic areas addressed by a financial manager.
Answer:
Explain how flotation costs affect the analysis of a levered project.
Answer:
The All-Mine Corporation is deciding whether to invest in a new project. The project
would have to be financed by equity, the cost is $2,000, and the return will be $2,500 in
one year. The discount rate for both bonds and stock is 15 percent and the tax rate is
zero. The predicted cash flows excluding this new project are $4,500 in a good
economy, $3,000 in an average economy, and $1,000 in a poor economy. Each
economic outcome is equally likely to occur and the promised debt repayment is
$3,000. Should the company take the project? What is the value of the firm and its debt
and equity components before and after the project addition?
Answer:
