Archives: Quiz

A global conglomerate has a debt beta of zero. If the cost of equity is 12.23 percent, and the risk-free rate is 4.36 percent, what is the firm’s pretax cost of debt? A. 4.36% B. 8.30% C. 7.87% D. 0% […]

Three months ago, you purchased a put option contract on WXX stock with a strike price of $61 and an option price of $.60. The option expires today when the value of WXX stock is $63.50. Ignoring trading costs and […]

Over the period of 1926 through 2014, the annual rate of return on _____ has been more volatile than the annual rate of return on _____. A. large-company stocks; small-company stocks B. U.S. Treasury bills; small-company stocks C. U.S. Treasury […]

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. […]

Graham and Harvey (2001) found that _____ were the two most popular capital budgeting methods. A. IRR and payback B. IRR and NPV C. NPV and PI D. IRR and modified IRR E. discounted payback and NPV Answer: Prepackaged bankruptcies: […]

In a reverse stock split: A. the number of shares outstanding increases and owners’ equity decreases. B. the firm buys back existing shares of stock on the open market. C. the firm sells new shares of stock on the open […]

Small Town Bank has total assets with a market value of $14.23 million and a duration of 2.64 years. The bank’s liabilities equal $12.87 million and its equity is $1.36 million on a market value basis. To hedge interest rate […]

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 […]

The Highlight Company is reviewing a proposed 7-year project with an initial cost of $687,400. The annual fixed costs are $92,800, the variable cost per unit is $49.79, and the sales price per unit is $89. The tax rate is […]

A project has earnings before interest and taxes of $5,750, fixed costs of $50,000, a selling price of $13 a unit, and a sales quantity of 11,500 units. Depreciation is $7,500. What is the variable cost per unit? A. $6.75 […]

In working on a bid project you have determined that $245,000 of fixed assets will be required and that they will be depreciated straight-line to zero over the 5-year life of the project. You have also determined that the discount […]

The forward rate is most apt to equal the spot rate when: A. the real rate of interest is declining. B. the inflation rates in the two countries are equal. C. purchasing power parity exists. D. the real rates of […]

Parametric or empirical models rely: A. on security betas explaining systematic factor relationships. B. on finding regularities and relations in past market data. C. on security returns always being located on the capital market line. D. solely on factors within […]

To determine the value of a rights offering, the stockholder needs to know the following two pieces of information in addition to the current stock price, the: A. subscription price and the number of rights needed to acquire a new […]

If a bond has a make-whole call provision, the: A. call premium can be either positive or negative. B. bond’s market price will always equal its face value. C. bondholder will receive the face value amount plus interest if the […]

Which one of the following is most apt to cause a firm to have a higher price-earnings ratio? A. slow industry outlook B. very low current earnings C. low market share D. low prospect of firm growth E. low investor […]

Assume the delta of a call option on a firm’s assets is .608. This means a $65,000 project will increase the value of the firm’s equity by: A. $27,902. B. $39,520. C. $43,820. D. $63,131. E. $89,600. Answer: Which one […]

Assume the single-factor APT model is applied to a security that has a negative factor beta. The security will: A. always have a positive rate of return. B. have an expected return greater than the risk-free rate. C. have an […]

The delta of a call measures the: A. time remaining to expiration compared to the option’s original maturity. B. change between an option’s original value and its current value. C. swing in the price of the call relative to the […]

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 […]

A registration statement is effective on the 20th day after filing unless: A. the SEC is backlogged with statements. B. a tombstone ad is issued indicating its demise. C. a letter of comment suggesting changes is issued by the SEC. […]

Which one of the following statements is correct concerning the organizational structure of a corporation? A. The vice president of finance reports to the chairman of the board. B. The controller reports to the chief financial officer. C. The controller […]

The intrinsic value of a put is equal to the: A. lesser of the strike price or the stock price. B. lesser of the stock price minus the exercise price or zero. C. lesser of the stock price or zero. […]

Permanently rejecting an investment project today may not be a wise decision primarily because: A. the size of the firm will be less than it would be with the project. B. there are always errors in the estimation of NPVs. […]

I. M. Greedy has been granted options on 500,000 shares. The stock is currently trading at $48 a share and the options are at the money. The standard deviation of returns averages 31 percent. The options mature in 5 years […]

Derivatives can be used to either hedge or speculate. These strategies: A. increase risk in both cases. B. decrease risk in both cases. C. spread or minimize risk in both cases. D. offset risk by hedging and increase risk by […]

Uptown Clothing just paid $1.50 as its annual dividend and increases its dividend by 2.5 percent each year. What will Uptown’s stock price be in ten years at a discount rate of 12.25 percent? A. $19.46 B. $22.08 C. $20.19 […]

Ratios that measure how efficiently a firm uses its assets to generate sales are known as _______ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. market value Answer: Stock K is expected to return 12.4 […]

Which one of the following statements is correct? A. Both partnerships and corporations incur double taxation. B. Sole proprietorships and partnerships are taxed in a similar fashion. C. Partnerships are the most complicated type of business to form. D. Both […]

The price of one country’s currency expressed in terms of another country’s currency is called the: A. absolute currency rate. B. cross inflation rate. C. depository rate. D. exchange rate. E. foreign interest rate. Answer: A merger in which an […]

Your firm receives 46 checks per month. Of these, 13 are for $1,250 and 33 are for $870. The delay for the $1,250 checks is 1.5 days; the $870 checks are delayed 2 days. What is the weighted average delay? […]

The annual interest paid by a bond divided by the bond’s face value is called the: A. coupon. B. face value. C. maturity. D. yield to maturity. E. coupon rate. Answer: A flow of unending and equal payments that occur […]

Individuals that continually monitor the financial markets seeking mispriced securities: A. tend to make substantial profits on a daily basis. B. tend to make the markets more efficient. C. are never able to find a security that is temporarily mispriced. […]

Which one of these statements is true? A. The cumulative finance surplus requirement is computed prior to adjusting for the minimum cash balance. B. A financially sound firm will always have a positive quarterly net cash flow. C. A negative […]

Four Wheels requires $1.75 million to fund a new project and has decided to raise the funds via a seasoned stock offering. Assume the firm will incur $140,000 in indirect costs and pay 8.63 percent of the gross proceeds in […]

Which one of these is a positive covenant? A. The firm must maintain a current ratio of 1.2 or better. B. The firm will not issue any debt with higher seniority. C. The firm cannot be acquired in a friendly […]

Metal Manufacturers receives three checks per month. The first check is for $194,000 and takes two days to clear. The second check is for $318,000 and clears in one day. The third check is for $38,000 and clears in 2.5 […]

Based on the period of 1926 through 2014, _____ have tended to outperform other securities over the long-term. A. U.S. Treasury bills B. large-company stocks C. long-term corporate bonds D. small-company stocks E. long-term government bonds Answer: One advantage of […]

The unlevered cost of capital is: A. the cost of capital for a firm with no equity in its capital structure. B. the cost of capital for a firm with no debt in its capital structure. C. the interest tax […]

A project will produce an operating cash flow of $7,300 a year for three years. The initial investment for fixed assets will be $11,600, which will be depreciated straight-line to zero over the asset’s 4-year life. The project will require […]

Companies will generally have a: A. low beta if their sales are directly related to the market cycle. B. high beta if their sales are highly dependent on the market cycle. C. high beta if sales are independent of the […]

You are considering a project in Norway with an initial cost of NKr135,000. The project is expected to return a one-time payment of NKr200,000 at the end of Year 5. The risk-free rate of return is 2.6 percent in the […]

The positive incremental net gain associated with the combination of two firms through a merger or acquisition is called: A. the agency conflict. B. goodwill. C. the merger cost. D. the consolidation effect. E. synergy. Answer: The basic assumption of […]

Leo received $7,500 today and will receive another $5,000 two years from today. He will invest these funds when he receives them and expects to earn a rate of return of 11.5 percent. What value does he expect his investments […]

The discount rate that makes the net present value of an investment exactly equal to zero is called the: A. external rate of return. B. internal rate of return. C. average accounting return. D. profitability index. E. equalizer. Answer: A […]

You recently purchased a stock that is expected to earn 12.6 percent in a booming economy, 8.9 percent in a normal economy and lose 5.2 percent in a recessionary economy. Each economic state is equally likely to occur. What is […]

Which of the following is NOT something a company should usually consider in crafting a strategy of social responsibility? A. Actions to benefit shareholders such as raising the dividend or boosting the stock price B. Making charitable contributions and supporting […]

In a diversified company, the strategy-making hierarchy consists of: A. corporate strategy and a group of business strategies (one for each line of business the corporation has diversified into). B. corporate or managerial strategy, a set of business strategies, and […]

Which of the following statements about total quality management (TQM) is FALSE? A. TQM aims at instilling enthusiasm and commitment to doing things right from the top to the bottom of the organization. B. TQM produces significant results very quickly, […]

The litmus test of a company’s code of ethics is: A. the degree to which it is connected to a company’s statement of core values. B. the extent to which it is embraced in crafting strategy and in the day-to-day […]