In the Black-Scholes model, the symbol “σ” is used to represent the standard deviation
of the:
A. option premium on a call with a specified exercise price.
B. rate of return on the underlying asset.
C. volatility of the risk-free rate of return.
D. rate of return on a risk-free asset.
E. option premium on a put with a specified exercise price.
Answer:
The pre-tax cost of debt:
A. is based on the current yield to maturity of the firm’s outstanding bonds.
B. is equal to the coupon rate on the latest bonds issued by a firm.
C. is equivalent to the average current yield on all of a firm’s outstanding bonds.
D. is based on the original yield to maturity on the latest bonds issued by a firm.
E. has to be estimated as it cannot be directly observed in the market.
Answer:
KT Enterprises has expanded its operations into a new field, which is the production of
everyday dinnerware. If this project goes well, the firm has the option to expand its
production into fine china. What type of option is this?
A. financial
B. strategic
C. put
D. intangible
E. call
Answer:
What is the standard deviation of the returns on a portfolio that is invested 52 percent in
stock Q and 48 percent in stock R?
A. 1.66 percent
B. 2.47 percent
C. 2.63 percent
D. 3.28 percent
E. 3.41 percent
Answer:
Which one of the following best describes the primary advantage of being a limited
partner instead of a general partner?
A. tax-free income
B. active participation in the firm’s activities
C. no potential financial loss
D. greater control over the business affairs of the partnership
E. maximum loss limited to the capital invested
Answer:
The common stock of Hazelton Refiners is selling for $72.30 a share. U.S. Treasury
bills are currently yielding 4.8 percent. What is the current value of a one-year call
option on this stock if the exercise price is $70 and you assume the option will finish in
the money?
A. $0
B. $1.20
C. $3.00
D. $4.20
E. $5.51
Answer:
Which of the following are reasons why a firm may want to divest itself of some of its
assets?
I. to raise cash
II. to unload unprofitable operations
III. to improve the strategic fit of a firm’s various divisions
IV. to comply with antitrust regulations
A. I and II only
B. I, II, and III only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Answer:
The Cement Works has a beginning cash balance for the quarter of $784. Susie, the
firm’s president, requires that a minimum cash balance of $900 be maintained and
requires that borrowing be used to maintain that balance. If funds have been borrowed,
then she requires that those loans be repaid as soon as excess funds are available.
Currently, the firm has a loan outstanding of $1,260. How much will the firm borrow or
repay this quarter if the quarterly receipts are $3,918 and the quarterly disbursements
are $3,774?
A. borrow $16
B. borrow $128
C. borrow $144
D. repay $28
E. repay $144
Answer:
The expected risk premium on a stock is equal to the expected return on the stock
minus the:
A. expected market rate of return.
B. risk-free rate.
C. inflation rate.
D. standard deviation.
E. variance.
Answer:
Exports Unlimited is an unlevered firm with an aftertax net income of $52,300. The
unlevered cost of capital is 14.1 percent and the tax rate is 36 percent. What is the value
of this firm?
A. $270,867
B. $339,007
C. $370,922
D. $378,444
E. $447,489
Answer:
Electronics Galore has 950,000 shares of common stock outstanding at a market price
of $38 a share. The company also has 40,000 bonds outstanding that are quoted at 106
percent of face value. What weight should be given to the debt when the firm computes
its weighted average cost of capital?
A. 42 percent
B. 46 percent
C. 50 percent
D. 54 percent
E. 58 percent
Answer:
Crystal Glass recently paid $3.60 as an annual dividend. Future dividends are projected
at $3.80, $4.10, and $4.25 over the next 3 years, respectively. Beginning 4 years from
now, the dividend is expected to increase by 3.25 percent annually. What is one share of
this stock worth to you if you require a 12.5 percent rate of return on similar
investments?
A. $42.92
B. $43.40
C. $45.12
D. $45.88
E. $46.50
Answer:
Precise Machinery is analyzing a proposed project. The company expects to sell 2,250
units, give or take 5 percent. The expected variable cost per unit is $260 and the
expected fixed costs are $589,000. Cost estimates are considered accurate within a plus
or minus 3 percent range. The depreciation expense is $129,000. The sales price is
estimated at $750 per unit, give or take 2 percent. What is the amount of the total costs
per unit under the worst case scenario?
A. $548.58
B. $551.62
C. $604.16
D. $638.23
E. $640.25
Answer:
Phone Home, Inc. is considering a new 5-year expansion project that requires an initial
fixed asset investment of $2.484 million. The fixed asset will be depreciated
straight-line to zero over its 5-year tax life, after which time it will be worthless. The
project is estimated to generate $2,208,000 in annual sales, with costs of $883,200. The
tax rate is 32 percent and the required return on the project is 11 percent. What is the net
present value for this project?
A. $1,432,155
B. $1,433,059
C. $1,434,098
D. $1,434,217
E. $1,435,008
Answer:
What is the variance of the returns on a portfolio comprised of $5,400 of stock G and
$6,600 of stock H?
A. .000709
B. .000848
C. .001475
D. .001554
E. .001568
Answer:
Bakers’ Town Bread is selling 1,200 shares of stock through a Dutch auction. The bids
received are as follows:
How much cash will Bakers’ Town Bread receive from selling these shares of stock?
Ignore all transaction and flotation costs.
A. $10,800
B. $12,000
C. $13,400
D. $14,400
E. $16,800
Answer:
Mark owns both a March $20 put and a March $20 call on Alpha stock. Which one of
the following statements correctly relates to Mark’s position? Ignore taxes and
transaction costs.
A. A price decrease in Alpha stock will increase the value of Mark’s call option.
B. A March $30 call is worth more than Mark’s $20 call.
C. The time premium on an April $20 put is less than the time premium on Mark’s put.
(Assume both puts expire in the same calendar year.)
D. A price increase in Alpha stock from $26 to $28 will increase the value of Mark’s
put.
E. If the intrinsic value of Mark’s put increases by $1 then the intrinsic value of his call
must either decrease by $1 or equal zero.
Answer:
What is the standard deviation of the returns on a stock given the following
information?
A. 1.57 percent
B. 2.03 percent
C. 2.89 percent
D. 3.42 percent
E. 4.01 percent
Answer:
What is the cost of two November $25 put option contracts on Dove stock given the
following price quotes?
A. $0.15
B. $0.30
C. $1.50
D. $15.00
E. $30.00
Answer:
Assume the standard deviation of the returns on ABC stock increases. The effect of this
change on the value of the call options on ABC stock is measured by which one of the
following?
A. theta.
B. vega.
C. rho.
D. delta.
E. gamma.
Answer:
Which one of following is the rate at which a stock’s price is expected to appreciate?
A. current yield
B. total return
C. dividend yield
D. capital gains yield
E. coupon rate
Answer:
Today, you are buying a one-year call on one share of Webster United stock with a
strike price of $40 per share and a one-year risk-free asset that pays 4 percent interest.
The cost of the call is $1.85 per share and the amount invested in the risk-free asset is
$38.46. What is the most you can lose on these purchases over the next year?
A. -$1.85
B. -$0.31
C. $0
D. $0.42
E. $1.54
Answer:
When the present value of the cash inflows exceeds the initial cost of a project, then the
project should be:
A. accepted because the internal rate of return is positive.
B. accepted because the profitability index is greater than 1.
C. accepted because the profitability index is negative.
D. rejected because the internal rate of return is negative.
E. rejected because the net present value is negative.
Answer:
What is the effective annual rate of 14.9 percent compounded continuously?
A. 15.59 percent
B. 15.62 percent
C. 15.69 percent
D. 15.84 percent
E. 16.07 percent
Answer:
The price of one Euro expressed in U.S. dollars is referred to as a(n):
A. ADR rate.
B. cross inflation rate.
C. depository rate.
D. exchange rate.
E. foreign interest rate.
Answer:
Which one of the following is a result of a small stock dividend?
A. increase in retained earnings
B. decrease in total owner’s equity
C. decrease in cash
D. decrease in capital in excess of par value
E. increase in common stock
Answer:
Which one of the following will decrease the net present value of a project?
A. increasing the value of each of the project’s discounted cash inflows
B. moving each of the cash inflows forward to a sooner time period
C. decreasing the required discount rate
D. increasing the project’s initial cost at time zero
E. increasing the amount of the final cash inflow
Answer:
Global Communications has a 7 percent, semiannual coupon bond outstanding with a
current market price of $1,023.46. The bond has a par value of $1,000 and a yield to
maturity of 6.72 percent. How many years is it until this bond matures?
A. 12.26 years
B. 12.53 years
C. 18.49 years
D. 24.37 years
E. 25.05 years
Answer:
The internal rate of return:
A. may produce multiple rates of return when cash flows are conventional.
B. is best used when comparing mutually exclusive projects.
C. is rarely used in the business world today.
D. is principally used to evaluate small dollar projects.
E. is easy to understand.
Answer:
Precision Tool is trying to decide whether to lease or buy some new equipment for its
tool and die operations. The equipment costs $1.2 million has a 7-year life, and will be
worthless after the 7 years. The pre-tax cost of borrowed funds is 8 percent and the tax
rate is 32 percent. The equipment can be leased for $242,500 a year. What is the net
advantage to leasing?
A. -$51,566
B. -$34,211
C. $37,549
D. $56,828
E. $79,664
Answer:
A firm’s external financing need is financed by which of the following?
A. retained earnings
B. net working capital and retained earnings
C. net income and retained earnings
D. debt or equity
E. owners’ equity, including retained earnings
Answer: