Thompson’s has determined that a new project is expected to have fixed costs of
$132,378, a contribution margin of $36.20, and a tax rate of 34 percent. The investment
has an initial cost of $548,000 that will be depreciated straight-line to zero over the
5-year life of the project. The EAC should be based on 5 years at 15 percent. What is
the expected present value break-even point in units per year?
A. 8,939
B. 9,046
C. 9,331
D. 9,849
E. 9,615
Answer:
You have gathered the following market value and duration information on Northern
Bank:
What new asset duration will immunize the balance sheet?
A. 1.22 years
B. .99 years
C. 1.36 years
D. 1.48 years
E. 1.13 years
Answer:
You have a sampling of returns for the Malta Stock Fund. The returns are 7.25 percent,
5.63 percent, 12.56 percent, and 1.08 percent. What is the average arithmetic return and
variance of this sampling?
A. 6.57%; .00287
B. 6.63%; .00225
C. 6.65%; .00215
D. 6.63%; .00287
E. 6.65%; .00215
Answer:
A firm with cyclical earnings is characterized by:
A. revenue patterns that vary with the business cycle.
B. high levels of debt in its capital structure.
C. high fixed costs.
D. high costs per unit.
E. low contribution margins.
Answer:
Browning’s has a debt-equity ratio of .47. What is the equity multiplier?
A. 1.47
B. .53
C. 2.13
D. 1.13
E. 1.53
Answer:
Arguments offered as explanations, with or without market evidence, as to why most
U.S. equity issues are sold without rights include all of the following except:
A. underwriters buy at an agreed upon price and bear some risk of selling the issue.
B. cash proceeds are available sooner in underwriting and the issue is available to a
wider market.
C. underwriters certify that the offering price is consistent with the true value of the
issue.
D. the underwritten offer price is generally set 48 hours prior to the offering while the
rights price must be set much further in advance.
E. underwriters tend to increase the stock price through their sales efforts.
Answer:
Firm A is planning on merging with Firm B. Firm A will pay Firm B’s stockholders the
current value of their stock in shares of Firm A because no synergy will be created.
Firm A currently has 3,000 shares of stock outstanding at a market price of $15 a share.
Firm B has 1,000 shares outstanding at a price of $10 a share. What is the value of the
merged firm?
A. $25,000
B. $45,000
C. $55,000
D. $60,000
E. $50,000
Answer:
One of the indirect costs of bankruptcy is the incentive for managers to take large risks.
When following this strategy:
A. the firm will rank all projects and select the project which results in the highest
expected firm value.
B. bondholders expropriate value from stockholders by selecting high-risk projects.
C. stockholders expropriate value from bondholders by selecting high-risk projects.
D. the firm will always select the lowest-risk project available.
E. the firm will select only all-equity financed projects.
Answer:
An increase in a firm’s number of shares outstanding without any change in owners’
equity is called a:
A. special dividend.
B. stock split.
C. share repurchase.
D. tender offer.
E. liquidating dividend.
Answer:
AJ’s Markets is being liquidated. The mortgage holder is owed $830,000, the other
secured creditors are owed $128,000, and the unsecured creditors are owed $329,000.
Administrative costs of liquidation, wage and benefit payments, and consumer claims
amount to $330,000. The firm owes no taxes. The building, which is mortgaged, just
netted $794,000 after sale costs. The remaining assets have yielded $467,000 in net
proceeds. How much will the unsecured creditors receive per each dollar they are
owed?
A. $.027
B. $.025
C. $.333
D. $1.00
E. $.533
Answer:
A capital intensity ratio of 1.03 means a firm has $1.03 in:
A. total debt for every $1 in equity.
B. equity for every $1 in total debt.
C. sales for every $1 in total assets.
D. total assets for every $1 in sales.
E. long-term assets for every $1 in short-term assets.
Answer:
Rudy’s stock is currently valued at $28.40 a share. The firm had earnings per share of
$1.86 last year and projects earnings of $2.09 a share for next year. What is the trailing
twelve month price-earnings ratio?
A. 13.59
B. 14.38
C. 12.84
D. 16.67
E. 15.27
Answer:
You own 200 shares of a stock valued at $21 a share. Each share is entitled to one right.
A rights offer grants you the option of obtaining one new share for two rights plus $17.
What is the value of each right?
A. $1.33
B. $1.25
C. $.33
D. $.67
E. $1.67
Answer:
What is the cash flow to stockholders for 2015?
A.
$1,200
B.
“$2,800
C.
$1,520
D.
“$1,600
E.
Answer:
BPJ stock is expected to earn 14.8 percent in a recession, 6.3 percent in a normal
economy, and lose 4.7 percent in a booming economy. The probability of a boom is 20
percent while the probability of a normal economy is 55 percent. What is the expected
rate of return on this stock?
A. 6.23%
B. 6.72%
C. 6.81%
D. 7.60%
E. 8.11%
Answer:
What is the operating cash flow for 2015?
A.$6,460
B.$9,069
C.$10,325
D.$3,753
E.$12,408
Answer:
Management has decided to accept a new project but has yet to decide when it should
commence. Which type of analysis would be most helpful at this time?
A. expansion analysis
B. timing option analysis
C. scenario analysis
D. sensitivity analysis
E. simulation analysis
Answer:
If you consider bondholders to be the owners of a firm, then those bondholders:
A. own a call option on the firm with an exercise price equal to the firm’s total equity.
B. own a put option on the firm with an exercise price equal to the firm’s total debt.
C. have written a put option on the firm with an exercise price equal to the firm’s total
equity.
D. have written a call option on the firm with an exercise price equal to the firm’s total
debt.
E. own a put option on the firm with an exercise price equal to the firm’s total assets.
Answer:
A payment made by a firm to its owners in the form of new shares of stock is called a
_____ dividend.
A. stock
B. normal
C. special
D. extra
E. liquidating
Answer:
Put-call parity can be used to show:
A. how far in-the-money put options can be.
B. how far in-the-money call options can be.
C. the precise relationship between put and call prices given equal exercise prices and
equal expiration dates.
D. that the value of a call option is always twice that of a put given equal exercise
prices and equal expiration dates.
E. that the value of a call option is always half that of a put given equal exercise prices
and equal expiration dates.
Answer:
Assume you are looking at an opportunity set representing many securities. Where
would the minimum variance portfolio be located in relation to this set?
A. at the lowest point of the set
B. in the exact center of the set
C. at the far-right point of the set
D. at the far-left point of the set
E. at the highest point of the set
Answer:
Several rumors concerning Wyslow stock have started circulating. These rumors are
causing the market price of the stock to become increasingly volatile. Given this
situation, you decide to buy both a one-month put and a one-month call option on this
stock with an exercise price of $15. You purchased the call at a quoted price of $.20 and
the put at a price of $2.10. What will be your total profit on these option positions if the
stock price is $6 on the day the options expire?
A. -$30
B. $670
C. $690
D. $710
E. $1,110
Answer:
All else held constant, the value of a call decreases when the:
A. time to expiration increases.
B. risk-free rate of return increases.
C. stock price increases.
D. exercise price increases.
E. volatility of the price of the underlying stock increases.
Answer:
The opportunity to defer investing in a project until a later date may have value
primarily because:
A. the cost of capital may increase.
B. project cash flows may be lower in the future.
C. investment costs tend to increase over time.
D. the option to abandon may disappear.
E. market conditions may improve.
Answer:
In general, the capital structures used by U.S. firms:
A. tend to overweigh debt in relation to equity.
B. are easily explained in terms of earnings volatility.
C. are easily explained by analyzing the types of assets owned by the various firms.
D. tend to be those which maximize the use of the firm’s available tax shelters.
E. vary significantly across industries.
Answer:
Variable costs:
A. change in direct relationship to the quantity of output produced.
B. are constant in the short-run regardless of the quantity of output produced.
C. are equal to the change in the fixed assets required to change the level of output.
D. are subtracted from fixed costs to compute the contribution margin.
E. are added to fixed costs on a per-unit basis to compute the contribution margin.
Answer:
Which party(ies) is(are) ultimately responsible for an invoice from a supplier that is
subject to a bankers’ acceptance?
A. the bank which issued the acceptance
B. the purchasing firm
C. the investors who purchased the banker’s acceptance
D. the vendor who issued the invoice
E. both the bank and the purchasing firm jointly
Answer:
Firm X is being acquired by Firm Y for $35,000 cash which is being provided by
retained earnings. The synergy of the acquisition is $5,000. Firm X has 2,000 shares of
stock outstanding at a price of $16 a share. Firm Y has 10,200 shares of stock
outstanding at a price of $46 a share. What is the value of Firm Y after the acquisition?
A. $534,750
B. $471,200
C. $435,000
D. $468,900
E. $535,500
Answer:
Which one of the following occurs whenever a warrant is exercised?
A. the issuer receives the greater of the exercise price or the stock price
B. the number of shares outstanding increases
C. currently outstanding shares are exchanged between individual shareholders
D. a new warrant is issued to replace the exercised warrant
E. the issuer pays the lower of the exercise price or the stock price
Answer:
Given the following information, what is the value of d2 as it is used in the
Black-Scholes model?
A. .0216
B. -.8034
C. .1756
D. .20021
E. -.0251
Answer:
Anderson’s Furniture Outlet has an unlevered cost of capital of 10.3 percent, a tax rate
of 34 percent, and expected earnings before interest and taxes of $1,900. The company
has $4,000 in bonds outstanding that have an annual coupon of 7 percent. If the bonds
are selling at par, what is the cost of equity?
A. 11.33%
B. 9.34%
C. 10.72%
D. 9.99%
E. 11.21%
Answer:
The pretax salvage value of an asset is equal to the:
A. book value if straight-line depreciation is used.
B. book value if MACRS depreciation is used.
C. market value minus the book value.
D. book value minus the market value.
E. market value.
Answer:
SBX bonds have a face value of $1,000 and can be exchanged for 20 shares of stock.
Assume SBX declares a 3-for-1 stock split. What conversion price will be needed
following the stock split for the conversion value and the straight bond value to be
equal assuming the bond continually sells at par?
A. $16.67
B. $33.33
C. $50.00
D. $150.00
E. $66.67
Answer:
Taylor’s Hardware offers credit at an APR of 14.9 percent and compounds interest
monthly. What is the actual rate of interest they are charging?
A. 13.97%
B. 14.90%
C. 15.48%
D. 15.96%
E. 16.10%
Answer:
MM Proposition I with taxes is based on the concept that:
A. the optimal capital structure is the one that is totally financed with equity.
B. the capital structure of the firm does not matter because investors can use homemade
leverage.
C. the firm is better off with debt based on the weighted average cost of capital.
D. the value of the firm increases as total debt increases because of the interest tax
shield.
E. the cost of equity increases as the debt-equity ratio of a firm increases.
Answer: