Several rumors concerning Value Rite stock are causing the market price of the stock to
be quite volatile. Given this situation, you decide to buy both a one-month European
$25 put and a one-month European $25 call on this stock. The call price per share is
$0.60 and the put price per share is $2.10. What will be your net profit or loss on these
option positions if the stock price is $18 on the day the options expire? Ignore trading
costs and taxes.
A. -$210
B. -$150
C. -$60
D. $430
E. $490
Answer:
The Green Hornet sells earnings forecasts for international securities. Its credit terms
are 2/10, net 30. Based on experience, 55 percent of all customers will take the
discount. The firm sells 2,700 forecasts every month at a price of $1,100 each. What is
the firm’s average balance sheet amount in accounts receivable?
A. $940,274
B. $1,408,272
C. $1,855,233
D. $1,867,012
E. $1,915,387
Answer:
Which one of the following categories of securities had the lowest average risk
premium for the period 1926-2010?
A. long-term government bonds
B. small company stocks
C. large company stocks
D. long-term corporate bonds
E. U.S. Treasury bills
Answer:
Forecasting risk emphasizes the point that the correctness of any decision to accept or
reject a project is highly dependent upon the:
A. method of analysis used to make the decision.
B. initial cash outflow.
C. ability to recoup any investment in net working capital.
D. accuracy of the projected cash flows.
E. length of the project.
Answer:
The accounting manager of Gateway Inns has noted that every time the inn’s average
occupancy rate increases by 2 percent, the operating cash flow increases by 5.3 percent.
What is the degree of operating leverage if the contribution margin per unit is $47?
A. 0.38
B. 0.57
C. 1.75
D. 2.10
E. 2.65
Answer:
Which one of the following best illustrates erosion as it relates to a hot dog stand
located on the beach?
A. providing both ketchup and mustard for its customer’s use
B. repairing the roof of the hot dog stand because of water damage
C. selling fewer hot dogs because hamburgers were added to the menu
D. offering French fries but not onion rings
E. losing sales due to bad weather
Answer:
Which one of the following actions will tend to increase the accounts receivable period?
Assume the accounts receivable period is currently 34 days.
A. tightening the standards for granting credit to customers
B. refusing to grant additional credit to any customer who pays late
C. increasing the finance charges applied to all customer balances outstanding over
thirty days
D. granting discounts for cash sales
E. eliminating the discount for early payment by credit customers
Answer:
The Corner Grocer has a 7-year, 6 percent annual coupon bond outstanding with a
$1,000 par value. The bond has a yield to maturity of 5.5 percent. Which one of the
following statements is correct if the market yield suddenly increases to 7 percent?
A. The bond price will increase by $57.14.
B. The bond price will increase by 5.29 percent.
C. The bond price will decrease by $53.62.
D. The bond price will decrease by 8 percent.
E. The bond price will decrease by 8.36 percent.
Answer:
Which one of the following capital intensity ratios indicates the largest need for fixed
assets per dollar of sales?
A. 0.70
B. 0.86
C. 1.00
D. 1.06
E. 1.15
Answer:
Fama’s Llamas has a weighted average cost of capital of 9.5 percent. The company’s
cost of equity is 15.5 percent, and its pretax cost of debt is 8.5 percent. The tax rate is
34 percent. What is the company’s target debt-equity ratio?
A. 0.89
B. 0.92
C. 0.98
D. 1.01
E. 1.54
Answer:
A firm’s total investment in receivables depends primarily on the firm’s:
A. total sales and cash discount period.
B. cash to credit sales ratio.
C. bad debt ratio.
D. average collection period and amount of credit sales.
E. amount of credit sales and cash discount percentage.
Answer:
A project has a net present value of zero. Which one of the following best describes this
project?
A. The project has a zero percent rate of return.
B. The project requires no initial cash investment.
C. The project has no cash flows.
D. The summation of all of the project’s cash flows is zero.
E. The project’s cash inflows equal its cash outflows in current dollar terms.
Answer:
A firm has a debt-equity ratio of 0.42. What is the total debt ratio?
A. 0.30
B. 0.36
C. 0.44
D. 1.58
E. 2.38
Answer:
The capital asset pricing model (CAPM) assumes which of the following?
I. a risk-free asset has no systematic risk.
II. beta is a reliable estimate of total risk.
III. the reward-to-risk ratio is constant.
IV. the market rate of return can be approximated.
A. I and III only
B. II and IV only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Answer:
A project has a discounted payback period that is equal to the required payback period.
Given this, which of the following statements must be true?
I. The project must also be acceptable under the payback rule.
II. The project must have a profitability index that is equal to or greater than 1.0.
III. The project must have a zero net present value.
IV. The project’s internal rate of return must equal the required return.
A. I only
B. I and II only
C. II and III only
D. I, III, and IV only
E. I, II, III, and IV
Answer:
Great Lakes Health Care common stock offers an expected total return of 9.2 percent.
The last annual dividend was $2.10 a share. Dividends increase at a constant 2.6 percent
per year. What is the dividend yield?
A. 3.75 percent
B. 4.20 percent
C. 4.55 percent
D. 5.25 percent
E. 6.60 percent
Answer:
Jefferson Refining is issuing a rights offering wherein every shareholder will receive
one right for each share of stock they own. The new shares in this offering are priced at
$19 plus 3 rights. The current market price of the stock is $23 a share. What is the value
of one right?
A. $0.25
B. $1.00
C. $1.25
D. $1.50
E. $2.00
Answer:
Today, you sold 200 shares of Indian River Produce stock. Your total return on these
shares is 6.2 percent. You purchased the shares one year ago at a price of $31.10 a
share. You have received a total of $100 in dividends over the course of the year. What
is your capital gains yield on this investment?
A. 3.68 percent
B. 4.59 percent
C. 5.67 percent
D. 7.26 percent
E. 7.41 percent
Answer:
New Schools, Inc. expects an EBIT of $7,000 every year forever. The firm currently has
no debt, and its cost of equity is 15 percent. The firm can borrow at 8 percent and the
corporate tax rate is 34 percent. What will the value of the firm be if it converts to 50
percent debt?
A. $31,796.47
B. $36,036.00
C. $37,407.16
D. $37,552.08
E. $38,119.30
Answer:
Which one of the following describes the lower bound of a call’s value?
A. strike price or zero, whichever is greater
B. stock price minus the exercise price or zero, whichever is greater
C. strike price or the stock price, whichever is lower
D. strike price or zero, whichever is lower
E. stock price minus the exercise price or zero, whichever is lower
Answer:
The concept of homemade leverage is most associated with:
A. M & M Proposition I with no tax.
B. M & M Proposition II with no tax.
C. M & M Proposition I with tax.
D. M & M Proposition II with tax.
E. static theory proposition.
Answer:
Assume the price of Westward Co. stock increases by one percent. Which one of the
following measures the effect that this change in the stock price will have on the value
of the Westward Co. options?
A. theta
B. vega
C. rho
D. delta
E. gamma
Answer:
M & M Proposition I with no tax supports the argument that:
A. business risk determines the return on assets.
B. the cost of equity rises as leverage rises.
C. the debt-equity ratio of a firm is completely irrelevant.
D. a firm should borrow money to the point where the tax benefit from debt is equal to
the cost of the increased probability of financial distress.
E. homemade leverage is irrelevant.
Answer:
Alfredo has a non-cancelable, five year lease on an industrial-grade sewing machine for
stitching upholstery. For accounting purposes, this is considered to be a capital lease.
The life of the sewing machine is five years. Alfredo must pay all taxes and insurances
related to this lease. Which type of lease does Alfredo have on this sewing machine?
A. open
B. straight
C. operating
D. financial
E. tax-oriented
Answer:
A news flash just appeared that caused about a dozen stocks to suddenly drop in value
by about 20 percent. What type of risk does this news flash represent?
A. portfolio
B. nondiversifiable
C. market
D. unsystematic
E. total
Answer:
Shares of Hot Donuts common stock are currently selling for $32.35. The last annual
dividend paid was $1.25 per share and the market rate of return is 10.7 percent. At what
rate is the dividend growing?
A. 6.58 percent
B. 8.67 percent
C. 10.42 percent
D. 12.60 percent
E. 14.10 percent
Answer:
Which one of the following is most directly affected by the level of systematic risk in a
security?
A. variance of the returns
B. standard deviation of the returns
C. expected rate of return
D. risk-free rate
E. market risk premium
Answer:
A project has average net income of $5,900 a year over its 6-year life. The initial cost of
the project is $98,000 which will be depreciated using straight-line depreciation to a
book value of zero over the life of the project. The firm wants to earn a minimum
average accounting return of 11.5 percent. The firm should _____ the project because
the AAR is _____ percent.
A. accept; 5.71
B. accept; 9.90
C. accept; 12.04
D. reject; 5.71
E. reject; 12.04
Answer:
What is the final day on which an option can be exercised called?
A. payment date
B. ex-option date
C. opening date
D. expiration date
E. intrinsic date
Answer:
You currently own a one-year call option on Rail Company, Inc., stock. The current
stock price is $52.75 and the risk-free rate of return is 4.25 percent. Your option has a
strike price of $50 and you assume the option will finish in the money. What is the
current value of your call option?
A. $1.20
B. $2.59
C. $4.79
D. $5.13
E. $7.27
Answer:
The book value of a firm is:
A. equivalent to the firm’s market value provided that the firm has some fixed assets.
B. based on historical cost.
C. generally greater than the market value when fixed assets are included.
D. more of a financial than an accounting valuation.
E. adjusted to the market value whenever the market value exceeds the stated book
value.
Answer:
Consider the following premerger information about a bidding firm (Firm B) and a
target firm (Firm T). Assume that neither firm has any debt outstanding.
Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is
$2,500. What is the NPV of the merger assuming that Firm T is willing to be acquired
for $28 per share in cash?
A. $100
B. $400
C. $1,800
D. $2,200
E. $2,600
Answer:
Bell Weather Markets has recently sold for as little as $8 a share and as much as $15 a
share. The difference between these two prices is referred to as the:
A. price variance.
B. bid-ask spread.
C. trading range.
D. opening price.
E. closing price.
Answer:
Gerold invested $5,600 in an account that pays 5 percent simple interest. How much
money will he have at the end of ten years?
A. $7,710
B. $8,000
C. $8,400
D. $8,678
E. $9,099
Answer: