Which one of the following is the best example of systematic risk?
A. the price of lumber declines sharply
B. airline pilots go on strike
C. the Federal Reserve increases interest rates
D. a hurricane hits a tourist destination
E. people become diet conscious and avoid fast food restaurants
Answer:
Peggy Grey’s Cookies had net income of $8,110. The firm paid out 30 percent of the net
income to its shareholders as dividends. During the year, the company repurchased
$500 worth of common stock. What is the cash flow to stockholders?
A.$2,933
B.$5,177
C.$1,933
D.$2,433
E.$2,967
Answer:
Project A has an initial cost of $75,000 and annual cash flows of $33,000 for three
years. Project B costs $60,000 and has cash flows of $25,000, $30,000, and $25,000 for
Years 1 to 3, respectively. Projects A and B are mutually exclusive. The incremental
IRR is _______ and if the required rate is higher than the crossover rate then Project
_______ should be accepted.
A. 13.94%; A
B. 12.89%; B
C. 12.89%; A
D. 13.94%; B
E. 15.86%; A
Answer:
A _____ is a derivative security that gives the owner the right, but not the obligation, to
sell an asset at a fixed price for a specified period of time.
A. futures contract
B. call option
C. put option
D. swap
E. forward contract
Answer:
The flow-to-equity (FTE) approach in capital budgeting is defined as the:
A. discounting of all project cash flows at the overall cost of capital.
B. scale enhancing discount process.
C. discounting of a project’s levered cash flows to the equityholders at the required
return on equity.
D. dividends and capital gains that may flow to shareholders of a firm.
E. discounting of a project’s unlevered cash flows to the equityholders at the WACC.
Answer:
In order to make a decision utilizing a decision tree, you must:
A. start at the most distant point in time and work backwards to Time 0.
B. begin at Time 0 and work towards the most distant point in time.
C. start at the top of the tree and work vertically downward to the very bottom.
D. start at the middle of the tree and work both upwards and downwards
simultaneously.
E. concentrate only on the limbs with the highest probability of occurrence levels.
Answer:
As the degree of sensitivity of a project to a single variable rises, the:
A. lower the forecasting risk of the project.
B. smaller the range of possible outcomes given a pre-defined range of values for the
input.
C. more attention management should place on accurately forecasting that variable.
D. lower the maximum potential value of the project.
E. lower the maximum potential loss of the project.
Answer:
Which one of the following is not a reason why firms choose repurchases rather than
dividends?
A. provide flexibility
B. increase the value of existing stock options
C. provide shareholders with a tax advantage
D. offset dilution
E. conserve cash
Answer:
In a tax-free acquisition, the shareholders of the target firm:
A. receive income that is considered to be tax-exempt.
B. gift their shares to a tax-exempt organization and therefore have no taxable gain.
C. are viewed as having exchanged their shares.
D. sell their shares to a qualifying entity thereby avoiding both income and capital gains
taxes.
E. sell their shares at cost thereby avoiding the capital gains tax.
Answer:
What kind of trade involves agreeing today on an exchange rate for settlement in 90
days?
A. spot trade
B. futures trade
C. forward trade
D. triangle trade
E. complex trade
Answer:
The financial ratio that measures the accounting profit per dollar of book equity is
referred to as the:
A. profit margin.
B. price-earnings ratio.
C. return on equity.
D. equity turnover.
E. market profit-to-book ratio.
Answer:
The main difference between a forward contract and a cash transaction is:
A. a forward contract provides an option while a cash transaction is an obligation.
B. a forward contract is fulfilled at a later date while the cash transaction is carried out
immediately.
C. the price of a forward contract is decided at a later date while a cash transaction
occurs at the current spot rate.
D. a cash transaction can be reversed but a forward contract cannot.
E. the forward contract can be negotiated while a cash transaction cannot.
Answer:
A business formed by two or more individuals who each have unlimited personal
liability for all of the firm’s debts is called a:
A. corporation.
B. sole proprietorship.
C. general partnership.
D. limited partnership.
E. limited liability company.
Answer:
Which one of the following statements is correct concerning the expected rate of return
on an individual stock given various states of the economy?
A. The expected return is a geometric average where the probabilities of the economic
states are used as the exponential powers.
B. The expected return is an arithmetic average of the individual returns for each state
of the economy.
C. The expected return is a weighted average where the probabilities of the economic
states are used as the weights.
D. The expected return is equal to the summation of the values computed by dividing
the expected return for each economic state by the probability of the state.
E. As long as the total probabilities of the economic states equal 100 percent, then the
expected return on the stock is a geometric average of the expected returns for each
economic state.
Answer:
A contract wherein the bidding firm agrees to limit its holdings in the target firm is
called a:
A. supermajority amendment.
B. standstill agreement.
C. greenmail provision.
D. poison pill amendment.
E. white knight provision.
Answer:
Investing in a negative NPV project today may be a feasible choice if:
A. there are future option alternatives.
B. all of the future options were included in the NPV analysis.
C. the current discount rate is low.
D. all future options will be ignored by decision makers.
E. the discount rate is expected to increase over time.
Answer:
Peter’s Audio has a yield to maturity on its debt of 7.8 percent, a cost of equity of 12.4
percent, and a cost of preferred stock of 8 percent. The firm has 105,000 shares of
common stock outstanding at a market price of $22 a share. There are 25,000 shares of
preferred stock outstanding at a market price of $45 a share. The bond issue has a total
face value of $1.5 million and sells at 98 percent of face value. If the tax rate is 34
percent, what is the weighted average cost of capital?
A. 9.04%
B. 8.54%
C. 8.69%
D. 9.22%
E. 9.45%
Answer:
A key reason for acquisitions is synergy. Synergy includes all of the following except:
A. revenue enhancements.
B. cost reductions.
C. decreased taxes.
D. decreased cash flows.
E. increased efficiency.
Answer:
If an infinite number of intervals is applied to the binomial option pricing model, then
the value of the call is equal to:
A. the risk-free rate of return.
B. zero.
C. the exercise price.
D. the Black Scholes model’s call value.
E. the stock price.
Answer:
Last year, Johnson Mills had annual revenue of $37,800, cost of goods sold of $23,200,
and administrative expenses of $6,300. The firm paid $700 in dividends and had a tax
rate of 35 percent. The firm added $2,810 to retained earnings. The firm had no
long-term debt. What was the depreciation expense?
A.$2,300
B.$1,520
C.$2,640
D.$1,780
E.$2,900
Answer:
Vinnie’s Motors has a market-to-book ratio of 3.4. The book value per share is $34 and
earnings per share are $1.36. Holding the market-to-book ratio and earnings per share
constant, a $1 increase in the book value per share will:
A. decrease the price-earnings ratio.
B. decrease the EV multiple.
C. decrease the market price per share.
D. increase the price-earnings ratio.
E. increase the return on equity.
Answer:
Which type of offering will generally incur the lowest direct issue costs as a percentage
of gross proceeds?
A. small-sized IPO
B. straight bonds
C. SEO
D. large-sized IPO
E. convertible bonds
Answer:
A portfolio is entirely invested into BBB stock, which is expected to return 16.4
percent, and ZI bonds, which are expected to return 8.6 percent. 48 percent of the funds
are invested in BBB and the rest in ZI. What is the expected return on the portfolio?
A. 13.64%
B. 14.36%
C. 12.34%
D. 14.20%
E. 11.69%
Answer:
Selling a covered call is equivalent to:
A. buying a zero coupon bond and selling a put.
B. selling a put and buying an offsetting call.
C. buying the stock and selling the call.
D. selling a zero coupon bond and buying a put.
E. buying a zero coupon bond and buying a call.
Answer:
Fixed costs for a new project:
A. are ignored in break-even analysis since they remain constant.
B. will remain constant on a per unit basis over a given range of output.
C. should include an allocation for a portion of the firm’s current overhead expenses.
D. include all opportunity and sunk costs.
E. disappear immediately if future production is halted.
Answer:
The measure of net income returned from every dollar invested in total assets is the:
A. profit margin.
B. return on assets.
C. return on equity.
D. asset turnover.
E. earnings before interest and taxes.
Answer:
At the optimal inventory level, the:
A. inventory is held to its daily minimum level.
B. inventory is maintained at a level equal to one week’s production needs.
C. carrying costs equal the restocking costs.
D. inventory opportunity costs are zero.
E. shortage costs are eliminated.
Answer:
In 2008, which asset class had the highest rate of return in the U.S.?
A. small-company stocks
B. long-term U.S. Treasury bonds
C. large-company stocks
D. short-term U.S. Treasury bonds
E. high-quality long-term corporate bonds
Answer:
Hedging in the futures markets can reduce all risk if:
A. price movements in both the cash and futures markets are perfectly correlated.
B. price movements in both the cash and futures markets have zero correlation.
C. price movements in both the cash and futures markets are less than perfectly
correlated.
D. the hedge is a short hedge, but not a long hedge.
E. the hedge is a long hedge, but not a short hedge.
Answer:
You would like to combine a risky stock with a beta of 1.87 with U.S. Treasury bills in
such a way that the risk level of the portfolio is equivalent to the risk level of the overall
market. What percentage of the portfolio should be invested in the risky stock?
A. 54.15%
B. 53.48%
C. 55.09%
D. 52.91%
E. 54.67%
Answer:
The intrinsic value of a call equals the:
A. exercise price minus the stock price.
B. upper bound of the call’s value.
C. market price of the call option.
D. lower bound of the call’s value.
E. premium paid to purchase the call.
Answer:
Concerning convertible bonds, which one of these statements is false?
A. The value of a convertible bond can be greater than its straight bond value.
B. The value of a convertible bond may be greater than its conversion value.
C. A convertible bond can be separated into two distinct securities.
D. The coupon rate on a nonconvertible bond will generally exceed the coupon rate on
an otherwise identical convertible bond.
E. An increase in the conversion price lowers the conversion ratio.
Answer:
Which one of the following is an example of a nondiversifiable risk?
A. a well-respected president of a firm suddenly resigns
B. a well-respected chairman of the Federal Reserve Bank suddenly resigns
C. a key employee suddenly resigns and accepts employment with a key competitor
D. a well-managed firm reduces its work force and automates several jobs
E. a poorly managed firm suddenly goes out of business due to lack of sales
Answer: