You expect an investment to return $11,300, $14,600, $21,900, and $38,400 annually
over the next four years, respectively. What is this investment worth to you today if you
desire a rate of return of 16.5 percent?
A. $64,253.91
B. $58,700.89
C. $63,732.41
D. $55,153.57
E. $59,928.16
Answer:
Draw a graph that represents an opportunity set for a two-asset combination. Indicate
four points on the graph as follows: (1) the minimum variance portfolio. (2) point (A)
which represents the best return to risk combination, (3) point (B) which provides the
same return but with more risk than point (A) and, (4) point (C) which has the same risk
but a lower return than point (A). Lastly, indicate the efficient frontier.
Answer:
Sam owns an oil field with a number of producing wells. In the past, he has started and
stopped production of these wells as the price of oil fluctuated over time.Assume the
government imposes additional requirements on non-producing wells that are still
production capable. These requirements are expected to increase the cost of stopping
well production by 30 percent. As a result, Sam should be:
A. keeping all wells open continuously.
B. closing wells only if he plans to keep them closed permanently.
C. willing to keep wells operating at a lower level of profitability than he has in the
past.
D. increasing the cost of capital he applies to his well evaluation analysis.
E. opening wells at a lower popen price.
Answer:
Assume the current spot rate for the Norwegian krone is $1 = NKr6.83, the expected
inflation rate in Norway is 2.4 percent while it is 2.6 in the U.S. A risk-free asset in the
U.S. is yielding 4.5 percent. What real rate of return should you expect on a risk-free
Norwegian security?
A. 4.3%
B. 4.7%
C. 1.9%
D. 2.1%
E. 2.4%
Answer:
LIBOR stands for:
A. Lausanne Interest Basis Offered Rate.
B. London International Offered Rate.
C. London Interbank Offered Rate.
D. London Interagency Offered Rate.
E. London International Option Rate.
Answer:
Janet saves $3,000 a year at an interest rate of 4.2 percent. What will her savings be
worth at the end of 35 years?
A. $229,317.82
B. $230,702.57
C. $230,040.06
D. $234,868.92
E. $236,063.66
Answer:
Which one of the following is not one of the four main functions provided by
underwriters?
A. assumption of some market risk
B. responsibility for marketing securities
C. auditing the financial statements
D. certifying the value of an offering
E. establishing the offer price
Answer:
Which one of the following statements is correct concerning market efficiency?
A. Markets tend to be more efficient when the frequency of price changes diminishes.
B. If a market is efficient, arbitrage opportunities should be common.
C. In an efficient market, some market participants will have an advantage over others.
D. A firm will generally receive a fair price when it sells newly issued shares of stock.
E. New information will gradually be reflected in a stock’s price to avoid spooking
investors.
Answer:
The underlying assumption of the dividend growth model is that a stock is worth:
A. the same amount to every investor regardless of their desired rate of return.
B. the present value of the future income that the stock is expected to generate.
C. an amount computed as the next annual dividend divided by the market rate of
return.
D. the same amount as any other stock that pays the same current dividend and has the
same required rate of return.
E. an amount computed as the next annual dividend divided by the required rate of
return.
Answer:
Eastern Shore Merchants has 75,000 shares and 50,000 warrants currently outstanding.
A warrant holder can purchase one new share of stock in exchange for four warrants
plus $20. The stock is currently selling for $20.60 per share. What would be the gain
per new share from exercising the warrants, assuming all warrants are exercised?
A. $.15
B. $.51
C. $.60
D. $2.40
E. $2.04
Answer:
The two primary methods of a financial restructuring are:
A. a private workout and a Chapter 7 bankruptcy.
B. a Chapter 7 and a Chapter 11 bankruptcy.
C. a stock repurchase and a private workout.
D. a private workout and a Chapter 11 bankruptcy.
E. a stock repurchase and a Chapter 11 bankruptcy.
Answer:
The Tinslow Co. has 125,000 shares of stock outstanding at a market price of $93 a
share. The company has just announced a 5-for-2 stock split. How many shares of stock
will be outstanding after the split?
A. 50,000
B. 75,000
C. 156,250
D. 175,000
E. 312,500
Answer:
The zero coupon bonds of Mark Enterprises have a market price of $394.47, a face
value of $1,000, and a yield to maturity of 6.87 percent based on semiannual
compounding. How many years is it until this bond matures?
A. 11.08 years
B. 10.49 years
C. 13.77 years
D. 12.64 years
E. 15.42 years
Answer:
Which one of the following provides the option of selling a stock anytime during the
option period at a specified price even if the market price of the stock declines to zero?
A. American call
B. European call
C. American put
D. European put
E. either an American or a European put
Answer:
In a multi-factor APT model, F, represents:
A. the degree of reaction a security or portfolio has to a systematic risk.
B. the forecasted market rate of return.
C. the forecasted market risk premium.
D. a surprise.
E. the risk-free rate.
Answer:
An efficient capital market is one in which:
A. brokerage commissions are zero.
B. taxes are irrelevant.
C. securities always offer a positive NPV.
D. all investments earn the market rate of return.
E. security prices reflect all available information.
Answer:
Which one of the following statements concerning call option writers is false?
A. Writers promise to deliver shares if the call option is exercised by the buyer.
B. The writer has the option to sell shares but not an obligation.
C. The writer’s payoff is zero if the option expires out-of-the-money.
D. The writer receives a cash payment when the option is purchased.
E. The writer incurs a loss if the market price rises substantially above the exercise
price.
Answer:
Priscilla owns 500 shares of Deltona stock. It is January 1, 2016, and the company
recently issued a statement that it will pay a $1 per share dividend on December 31,
2016, a $2.50 per share dividend on December 31, 2017, and then cease all future
dividends. Priscilla does not want any dividend income this year but does want as much
dividend income as possible next year. Priscilla can earn 8.5 percent on her
investments. Ignoring taxes, what will Priscilla’s homemade dividend per share be in
2017?
A. $0
B. $3.50
C. $2.50
D. $3.59
E. $1.00
Answer:
Two Sisters Dresses has net working capital of $43,800, net fixed assets of $232,400,
net income of $43,900, and current liabilities of $51,300. The tax rate is 35 percent and
the profit margin is 9.3 percent. How many dollars worth of sales are generated from
every $1 in total assets?
A. $1.44
B. $1.32
C. $1.73
D. $.97
E. $1.06
Answer:
A 3-year project requires an initial fixed asset investment of $148,000, has annual fixed
costs of $39,800, a contribution margin of $14.62, a tax rate of 34 percent, a discount
rate of 15 percent, and straight-line depreciation over the project’s life. The assets will
be worthless at the end of the project. What is the present value break-even point in
units per year?
A. 6,086
B. 7,613
C. 7,504
D. 7,702
E. 7,911
Answer:
Which one of the following statements is correct concerning ratio analysis?
A. A single ratio is often computed differently by different individuals.
B. Ratios do not address the problem of size differences among firms.
C. Only a very limited number of ratios can be used for analytical purposes.
D. Each ratio has a specific formula that is used consistently by all analysts.
E. Ratios cannot be used for comparison purposes over periods of time.
Answer:
The option to abandon is:
A. a real option.
B. usually of little value because of the costs associated with abandonment.
C. irrelevant in capital budgeting analysis.
D. nearly always less relevant the option to expand.
E. of no value to a project.
Answer:
From a tax-paying investor’s point of view, a stock repurchase:
A. is equivalent to a cash dividend.
B. is more desirable than a cash dividend.
C. has the same tax effects as a cash dividend.
D. is more highly taxed than a cash dividend.
E. creates a tax liability even if the investor does not sell any of the shares he owns.
Answer:
Kay owns two annuities that will each pay $500 a month for the next 12 years. One
payment is received at the beginning of each month while the other is received at the
end of each month. At a discount rate of 7.25 percent, compounded monthly, what is the
difference in the present values of these annuities?
A. $289.98
B. $265.42
C. $299.01
D. $308.00
E. $312.50
Answer:
Yesterday, Smiley Company sold $22,500 of merchandise on credit. The invoice was
sent today with the terms, 3/10 net 40. This customer normally pays on the net date.
What is the effective rate of interest the customer is paying by not taking the discount?
Assume a 365-day year.
A. 42.31%
B. 44.86%
C. 39.27%
D. 40.54%
E. 45.38%
Answer:
ABC owns 15 percent of XYZ Corporation. What tax benefit does ABC derive from
this situation?
A. ABC receives no tax benefit but XYZ is only taxed on 30 percent of its net income.
B. ABC benefits because it is able to treat any XYZ dividends it receives as interest
income.
C. Seventy percent of the dividends paid by XYZ to ABC is exempt from income taxes.
D. ABC can exclude 30 percent of any XYZ dividends received from its taxable
income.
E. All dividend income ABC receives from XYZ is tax-exempt.
Answer:
Financial managers should primarily strive to:
A. minimize costs while increasing current dividends.
B. maximize the current profits of the firm.
C. maximize the current value per share of existing stock.
D. maximize current dividends even if doing so adds financial distress costs to the firm.
E. maximize current market share in every market in which the firm participates.
Answer:
A public firm’s market capitalization is equal to the:
A. total book value of assets less book value of debt.
B. par value of common equity.
C. price per share multiplied by number of shares outstanding.
D. firm’s stock price multiplied by the number of shares authorized.
E. the maximum value an acquirer would pay for the firm in an acquisition.
Answer:
The holders of Xenron Corporation’s bond with a face value of $1,000 can exchange
that bond for 35 shares of stock. The stock is selling for $22.00. What is the conversion
price?
A. $22.00
B. $28.57
C. $35.00
D. $1.30
E. $1.27
Answer:
An investor discovers that predictions about weather patterns published years in
advance and found in the Farmer’s Almanac are amazingly accurate. In fact, these
predictions enable the investor to predict the health of the farm economy and therefore
certain security prices. This finding is a violation of the:
A. moderate form of the efficient market hypothesis.
B. semistrong form of the efficient market hypothesis.
C. strong form of the efficient market hypothesis.
D. weak form of the efficient market hypothesis.
E. efficient market hypothesis at all levels.
Answer:
Assume a merger of two levered firms produced no synergy. In this case, the:
A. acquiring firm shareholders would neither gain nor lose any value.
B. bondholders probably benefit at shareholders’ expense.
C. diversification effect would only benefit the acquired firm’s shareholders.
D. combined shareholders would benefit at the expense of all debt holders.
E. shareholders and bondholders would fail to realize any benefits or losses.
Answer:
An analysis of the relationship between the sales volume and accounting profitability is
called _____ analysis.
A. forecasting
B. scenario
C. sensitivity
D. simulation
E. break-even
Answer:
The pecking order states that firms should:
A. use internal financing first.
B. always issue debt then the market won’t know when management thinks the security
is overvalued.
C. issue new equity first.
D. issue debt first.
E. always issue equity to avoid financial distress costs.
Answer:
A security held in a well-diversified portfolio that has a beta of zero in a one-factor
model will have an expected return of:
A. zero.
B. the market risk premium.
C. the risk-free rate.
D. less than the risk-free rate but not negative.
E. less than the risk-free rate which can be negative.
Answer: