For markets to be in equilibrium, that is, for there to be no strong pressure for prices to
depart from their current levels,
a.The expected rate of return must be equal to the required rate of return; that is,
.
b.The past realized rate of return must be equal to the expected future rate of return; that
is, .
c.The required rate of return must equal the past realized rate of return; that is,
.
d.All three of the above statements must hold for equilibrium to exist; that is,
.
e.None of these statements is correct.
Which of the following statements is most CORRECT?
a.Leveraged buyouts (LBOs) occur when a firm issues equity and uses the proceeds to
take a firm public.
b.In a typical LBO, bondholders do well but shareholders see their value decline.
c.Firms are forbidden by law to sell any assets during the first five years following a
leverage buyout.
d.Not all target firms are acquired by publicly traded corporations. In recent years, an
increasing number of firms have been acquired by private equity firms. Private equity
firms raise capital from wealthy individuals and look for opportunities to make
profitable investments.
e.In an LBO sometimes the acquiring group plans to run the acquired company for a
number of years, boost its sales and profits, and then take it public again as a stronger
company. In other instances, the LBO firm plans to sell off divisions to other firms that
can gain synergies. In either case, the acquiring group expects to make a substantial
profit from the LBO, but the inherent risks are small due to the heavy use of venture
capital and very little debt.
Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and
a beta of 1.2. The returns on the two stocks have a correlation coefficient of +0.6. You
have a portfolio that consists of 50% A and 50% B. Which of the following statements
is CORRECT?
a.The portfolio’s beta is less than 1.2.
b.The portfolio’s expected return is 15%.
c.The portfolio’s standard deviation is greater than 20%.
d.The portfolio’s beta is greater than 1.2.
e.The portfolio’s standard deviation is 20%.
Which of the following statements is most CORRECT?
a.One advantage of forward contracts is that they are default free.
b.Futures contracts generally trade on an organized exchange and are marked to market
daily.
c.Goods are never delivered under forward contracts, but are almost always delivered
under futures contracts.
d.Forward contracts are generally standardized instruments, whereas futures contracts
are generally tailor-made for the 2 parties of the contract.
e.Essentially there are no differences between forward and futures contracts, except that
forward contracts are used only for financial assets while futures contracts are used only
for commodities.
Which of the following statements is CORRECT?
a.The New York Stock Exchange is an auction market, and it has a physical location.
b.Home mortgage loans are traded in the money market.
c.If an investor sells shares of stock through a broker, then it would be a primary market
transaction.
d.Capital markets deal only with common stocks and other equity securities.
e.While the distinctions are blurring, investment banks generally specialize in lending
money, whereas commercial banks generally help companies raise capital from other
parties.
Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50% of Portfolio P is invested
in Stock A and 50% is invested in Stock B. If the market risk premium (rM – rRF) were
to increase but the risk-free rate (rRF) remained constant, which of the following would
occur?
a.The required return would increase for both stocks but the increase would be greater
for Stock B than for Stock A.
b.The required return would decrease by the same amount for both Stock A and Stock
B.
c.The required return would increase for Stock A but decrease for Stock B.
d.The required return on Portfolio P would remain unchanged.
e.The required return would increase for Stock B but decrease for Stock A.
Below are the 2013 and 2014 year-end balance sheets for Tran Enterprises:
The firm has never paid a dividend on its common stock, and it issued $2,400,000 of
10-year, non-callable, long-term debt in 2013. As of the end of 2014, none of the
principal on this debt had been repaid. Assume that the company’s sales in 2013 and
2014 were the same. Which of the following statements must be CORRECT?
a.The firm increased its short-term bank debt in 2014
b.The firm issued long-term debt in 2014
c.The firm issued new common stock in 2014
d.The firm repurchased some common stock in 2014
e.The firm had negative net income in 2014
Howton & Howton Worldwide (HHW) is planning its operations for the coming year,
and the CEO wants you to forecast the firm’s additional funds needed (AFN). Data for
use in the forecast are shown below. However, the CEO is concerned about the impact
of a change in the payout ratio from the 10% that was used in the past to 50%, which
the firm’s investment bankers have recommended. Based on the AFN equation, by how
much would the AFN for the coming year change if HHW increased the payout from
10% to the new and higher level? All dollars are in millions.
a.$31.9
b.$33.6
c.$35.3
d.$37.0
e.$38.9
The times-interest-earned ratio measures the extent to which operating income can
decline before the firm is unable to meet its annual interest costs.
a.True
b.False
What is the present value of the following cash flow stream at a rate of 12.0%?
a.$ 9,699
b.$10,210
c.$10,747
d.$11,284
e.$11,849
Your corporation has the following cash flows:
If the applicable income tax rate is 40% (federal and state combined), and if 70% of
dividends received are exempt from taxes, what is the corporation’s tax liability?
a.$ 83,980
b.$ 88,400
c.$ 92,820
d.$ 97,461
e.$102,334
Lincoln Lodging Inc. estimates that if its sales increase 10% then its net income will
increase 18%. The company’s EBIT equals $2.4 million, and its interest expense is
$400,000. The company’s operating costs include fixed and variable costs. What is the
level of the company’s fixed operating costs?
a.$1,083,000
b.$1,140,000
c.$1,200,000
d.$1,260,000
e.$1,323,000
There are call options on the common stock of XYZ Corporation. Which of the
following best describes the factors that affect call option values?
a.The price of call options will rise if XYZ’s stock price rises.
b.The higher the strike price, the higher the call option price.
c.Assuming the same strike price, a call option that expires in 1 month will sell for a
higher price than one that expires in 3 months.
d.The less volatile a stock’s price, the more valuable a call option on the stock is.
e.If the risk-free rate of interest increases, the value of call options will decrease.
Which of the following statements is CORRECT?
a.The NYSE does not exist as a physical location. Rather it represents a loose collection
of dealers who trade stock electronically.
b.An example of a primary market transaction would be your uncle transferring 100
shares of Walmart stock to you as a birthday gift.
c.Capital market instruments include both long-term debt and common stocks.
d.If your uncle in New York sold 100 shares of Microsoft through his broker to an
investor in Los Angeles, this would be a primary market transaction.
e.While the two frequently perform similar functions, investment banks generally
specialize in lending money, whereas commercial banks generally help companies raise
large blocks of capital from investors.