Archives: Quiz

Which of the following statements regarding the net present value rule and the rate of return rule is not true? A. Accept a project if NPV > cost of investment B. Accept a project if NPV is positive C. Accept […]

When faced with financial distress; managers of firms acting on behalf of their shareholders’ interests will: A. favor issuing large quantity of low quality debt to low quantity of high quality debt B. favor paying high dividends to the shareholders […]

You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C which have NPVs of + $70, -$40 and + $100, respectively. How would you go about making […]

Volatility of a bond is given by: I) Duration/ (1 + yield) II) Slope of the curve relating the bond price to the interest rate III) Yield to maturity A. I only B. II only C. III only D. I […]

You would like to have enough money saved to receive a growing annuity for 25 years, growing at a rate of 4% per year, the first payment being $60,000 after retirement, so that you and your family can lead a […]

In order to calculate the tax shield effect of interest payment for a corporation, always use the: I) average corporate tax rate II) marginal corporate tax rate III) state mandated tax rate A. I only B. II only C. III […]

If the NPV of project A is + $120, and that of project B is -$40 and that of project C is + $40, what is the NPV of the combined project? A. +$100 B. -$40 C. +$70 D. +$120 […]

Which of these dates occurs last in time (when arranged in the chronological order)? A. Payment date B. Ex-dividend date C. Record date D. Dividend declaration date The Granite Paving Co. wishes to have debt-to-equity ratio of 1.5. Currently it […]

An investor can create the effect of leverage on his/her account by: I) buying equity of an unlevered firm II) by investing in risk-free debt like T-bills III) by borrowing on his/her own account A. I only B. II only […]

A project costs $7 million and is expected to produce cash flows if $2 million a year for 10 years. The opportunity cost of capital is 16%. If the firm has to issue stock to undertake the project and issue […]

According to Strategy C, a firm would: A. Be in permanent need of short-term borrowing B. Have high current cash holdings C. Use low or no short-term debt and more long-term financing D. None of the above The main advantage […]

In calculating the weighted average cost of capital, the values used for D, E and V are: A. book values B. liquidating values C. market values D. none of the above Generally, which of the following is true? (b = […]

A firm in Australia earns a pretax profit of $A10 per share. It pays a corporate tax of $3 per share (30% tax rate) in taxes. The firm pays the remaining $A7 in dividends to a shareholder in 40% tax […]

Given the following data for Golf Corporation: market price/share = $12; Book value/share = $10; Number of shares outstanding = 100 million; market price/bond = $800; Face value/bond = $1,000; Number of bonds outstanding = 1 million; Calculate the proportions […]

You would like to have enough money saved to receive $100,000 per year perpetuity after retirement so that you and your family can lead a good life. How much would you need to save in your retirement fund to achieve […]

By undertaking the analysis in real terms, the financial manager avoids having to forecast inflation. Treasury bonds do not have default risk, but are subject to inflation risk. Answer: TRUE For an European option: Value of put = (Value of […]

An increase in the stock price results in an increase in the call option price. According to the authors, a reasonable range for the risk premium in the United States is 5% to 8%. Answer: TRUE The “law of conservation […]

Options written on volatile assets are worth more than options written on safer assets. The weighted average cost of capital (WACC) on an after-tax basis is calculated as: WACC = (rD) (1 – TC ) (D/V) + (rE) (E/V) where: […]

In almost al cases the present value break even quantity is higher than the accounting break even quantity. Short-term financial decisions are conceptually easier to make than long-term decisions. Answer: TRUE An European option gives its owner the right to […]

The WACC formula does not change when preferred stock is included. The smaller the time periods used in the binomial model the closer it will come to approximating the Black-Scholes model price. Answer: TRUE The risk that cannot be eliminated […]

The benefit-cost ratio is equal to profitability index plus one. The market value of debt is very close to the book value of debt for healthy firms. Answer: TRUE Depreciation acts as a tax shield in reducing the taxes. Answer: […]

If you accept the dividend irrelevancy theory, it is possible to maintain a high dividend clientele and still fund future growth. The addition of investment grade baseball trading cards is likely to expand the efficient frontier to a better risk […]

Monte Carlo simulation is a tool for considering all possible combinations of variables. Many companies have automatic dividend reinvestment plans (DRIPs). Answer: TRUE The original work conducted on the dividend payout practices of companies was conducted by Lintner. Answer: TRUE […]

Which of the following was NOT stated as contributing to the complication of estimating amount of interest carry? (A) The loan is drawn and interest is calculated on drawn amount (B) Revenue from each type of site varies (C) The […]

In order to calculate the APR for an ARM, you must, (A) Only use the first year’s given interest rate (B) Estimate interest rates over the life of the loan (C) Assume the worst case scenario and use interest rates […]

The marginal rate of return can be defined as the: (A) Return that results from holding the property for one additional year (B) IRR the year the internal rate of return starts to decrease from holding the property (C) Incremental […]

Which of the following statements about the loan in the question above are TRUE? (a) The market value of the loan is higher than the book value of the loan because the market rate of interest is lower than the […]

One way in which a mortgage pay-through bond (MPTB) is similar to a mortgage-backed bond (MBB) is that the pay-through bond is a debt obligation of the issuer. Home equity loans do not require a mortgage lien on the property. […]

The U.S. is the only country that allows REITs (or similar investments). The future value of a $1 annuity compounded at 5% annually is greater than the future value of a $1 annuity compounded at 5% semi-annually. Answer: FALSE Given […]

The existing stock of space cannot be adjusted in the short run, but can be increased or decreased in the long run. General industry standards for a conventional loan specify a maximum LTV of 60 percent. Answer: FALSE At least […]

A house that is financed with a below-market loan is available for sale. The value of the house will be higher than similar properties regardless of the other terms of the loan. One benefit of leverage is that it allows […]

Housing futures contracts allow investors to speculate on changes in home prices without actually owning a home. ARMs were developed because lenders were tired of offering a limited selection of loan alternatives to borrowers. Answer: FALSE Capital accounts are debited […]

An investor calculates an incremental return of renovating a building of 14%. Other properties provide a 12.5% overall rate of return to equity investors. Therefore, the property is a good investment. Generally, prices for zero coupon mortgage-backed bonds are more […]

Assume you have a choice between investing in either an equity REIT or Microsoft stock (MSFT). Which point in the figure above is NOT on the efficient portfolio frontier? (a) A (b) B (c) C (d) All points are on […]

Suppose that a developer pre-leases space to a financially strong, national tenant such as Home Depot, without having yet built the structure in which they will be leasing space. This is more commonly referred to as a: A. ground lease […]

As of 2011, the single largest asset category in the net worth portfolios of households is: A. government and corporate bonds B. stocks and mutual fund shares C. consumer durable goods D. housing Given the following information on a fixed-rate […]

Loan servicing includes a number of responsibilities such as collecting monthly mortgage payments from the borrower, remitting principal and interest payments to investors, ensuring sufficient escrow payments are being made by the borrower, and managing default if it should arise. […]

If a property transaction is scheduled to close on May 14th, calculate the individual tax responsibility for the buyer if the total tax owed at the end of the year is $5,000. For this problem, assume that we are dealing […]

Suppose that examination of a pro forma reveals that the fifth year net operating income (NOI) for an income producing property that you are analyzing is $138,446 (you can assume that this cash flow occurs at the end of the […]

In contrast to residential mortgage loans, most fixed-rate commercial mortgages do not allow borrowers to freely prepay the principal on their loan. Which of the following prepayment penalties ties the penalty that borrowers pay to how far interest rates have […]

Professor James Graaskamp often asserted that when one buys real estate, what one is buying is a set of assumptions about the future. Therefore, it is not surprising that the beginning point of the market research process is to: A. […]

For the purposes of estimating the effective borrowing cost (EBC), only those up-front expenses associated with obtaining the mortgage should be included, not the settlement costs associated with obtaining ownership of the property. With this in mind, which of the […]

The successful conveyance of real estate depends on a well-formed contract for sale since the contract dictates the rights and type of deed involved, as well as choreographs the entire transaction. Which of the following features of the contract for […]

The Real Estate Settlement Procedures Act (RESPA) is a federal law that requires federally chartered or insured lenders to provide buyers and sellers with information on all settlement costs. According to RESPA, loan closing information must be prepared on a […]

Suppose that we observe two comparable properties that have each sold twice within the past two years. Property A sold 24 months ago for $350,000 and Property B sold 18 months ago for $325,000. If the two properties were sold […]

According to the law of agency, real estate brokers are required to observe several duties as they act as an agent for an individual trying to buy or sell a property. Which of the following duties refers to a broker’s […]

Which of the following types of direct co-ownership is a form of joint tenancy for husband and wife created by marriage that protects each spouse from liens arising from either spouse alone? A. Tenancy in common B. Tenancy by the […]

Since investors prefer to have money now rather than later, money received next week, instead of today, is not worth as much to those receiving it, assuming the magnitude of the cash flow in each period is the same. Therefore […]

Competition for the currently available supply of locations and space coupled with the existing supply of leasable space, determines: A. the current level of rental rates for each submarket and property B. the riskiness of the expected cash flows of […]

In an indexed lease, rents are dependent on a regularly reported index, most commonly the consumer price index (CPI). By using the CPI as an index rate, the risk of unexpected increases in general inflation is shifted to the __________, […]