Reference no: EM13928717

Question 1: Which is the best measure of risk for an asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

• Variance; correlation coefficient.
• Standard deviation; correlation coefficient.
• Beta; variance.
• Coefficient of variation; beta.
• Beta; beta.

Question 2: Which of the following statements about pension plans if any, is incorrect?

• A defined contribution plan is, in effect, a savings plan that is funded by employers, although many plans also permit additional contributions by employees.
• Under a defined benefit plan, the employer agrees to give retirees a specifically defined benefit, such as $500 per month or 50 percent of the employee's final salary.
• A portable pension plan is one that an employee can carry from one employer to another.
• An employer's obligation is satisfied under a defined contribution plan when it makes the required contributions to the plan. The risk of inadequate investment returns is borne by the employee.
• If assets exceed the present value of benefits, the pension plan is fully funded.

Question 3: You have the following data on three stocks:

Stock Standard Deviation Beta
A 0.15 0.79
B 0.25 0.61
C 0.20 1.29

As a risk minimizer, you would choose Stock if it is to be held in isolation and Stock if it is to be held as part of a well-diversified portfolio.

A; A.
A; B.
B; C.
C; A.
C; B.

Question 4: Which of the following statements concerning capital structure theory is NOT

• The major contribution of Miller's theory is that it demonstrates that personal taxes decrease the value of using corporate debt.
• Under MM with zero taxes, financial leverage has no effect on a firm's value.
• Under MM with corporate taxes, the value of a levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt.
• Under MM with corporate taxes, rs increases with leverage, and this increase exactly offsets the tax benefits of debt financing.
• Under MM with corporate taxes, the effect of business risk is automatically incorporated because rsL is a function of rsU.

Question 5: Which of the following would cause average inventory holdings to decrease, other things held constant?

• Fixed order costs double.
• The purchase price of inventory items decreases by 50 percent.
• The carrying price of an item decreases (as a percent of purchase price).
• The sales forecast is revised downward by 10 percent.
• Interest rates fall.

Question 6: Which of the following is NOT a real option?

• The option to expand production if the product is successful.
• The option to buy shares of stock if its price goes up.
• The option to expand into a new geographic region.
• The option to abandon a project.
• The option to switch the type of fuel used in an industrial furnace.

Question 7: Which of the following statements is CORRECT?

• The typical R2 for a stock is about 0.3 and the typical R2
• for a portfolio is also about 0.3.
• The typical R2 for a stock is about 0.94 and the typical R2
• for a portfolio is about 0.6.
• The typical R2 for a stock is about 0.3 and the typical R2 for a large portfolio is about 0.94.
• The typical R2 for a stock is about 0.94 and the typical R2 for a portfolio is also about 0.94.
• The typical R2 for a stock is about 0.6 and the typical R2 for a portfolio is also about 0.6.

Question 8: Which of the following will NOT increase the value of a real option?

• Lengthening the time in which a real option must be exercised.
• An increase in the volatility of the underlying source of risk.
• An increase in the risk-free rate.
• An increase in the cost of obtaining the real option.
• A decrease in the probability that a competitor will enter the market of the project in question.

Question 9: Which of the following statements is most CORRECT?

• One advantage of forward contracts is that they are default free.
• Futures contracts generally trade on an organized exchange and are marked to market daily.
• Goods are never delivered under forward contracts, but are almost always delivered under futures contracts.
• There are futures contracts for currencies but no forward contracts for currencies.
• Futures contracts don't have any margin requirements but forward contracts do.

Question 10: Which of the following statements concerning the MM extension with growth is NOT

• The tax shields should be discounted at the cost of debt.
• The value of a growing tax shield is greater than the value of a constant tax shield.
• For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions.
• For a given D/S, the WACC is greater than the WACC under MM's original (with tax) assumptions.
• The total value of the firm increases with the amount of debt.

Question 11: In a portfolio of three different stocks, which of the following could NOT be true?

• The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation.
• The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.
• The beta of the portfolio is less than the betas of each of the individual stocks.
• The beta of the portfolio is greater than the beta of one or two of the individual stocks' betas.
• The beta of the portfolio can not be equal to 1.

Question 12: Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.)

• When held in isolation, Stock A has greater risk than Stock B.
• Stock B must be a more desirable addition to a portfolio than Stock A.
• Stock A must be a more desirable addition to a portfolio than Stock B.
• The expected return on Stock A should be greater than that on Stock B.
• The expected return on Stock B should be greater than that on Stock A.

Question 13: Which of the following are the factors for the Fama-French model?

• The excess market return, a size factor, and a book-to-market factor.
• The excess market return, a debt factor, and a book-to-market factor.
• The excess market return, a size factor, and a debt.
• A debt factor, a size factor, and a book-to-market factor.
• The excess market return, an industrial production factor, and a book-to-market factor.

Question 14: Which of the following statements is CORRECT?

• The Capital Market Line (CML) is a curved line that connects the risk-free rate and the market portfolio.
• The slope of the CML is ( M - rRF)/bM.
• All portfolios that lie on the CML to the right of sM are inefficient.
• All portfolios that lie on the CML to the left of sM are inefficient.
• M..sThe slope of the CML is ( M - rRF)/

Question 15: For markets to be in equilibrium (that is, for there to be no strong pressure for prices to depart from their current levels),

• The expected rate of return must be equal to the required rate of return; that is, .
• The past realized rate of return must be equal to the expected rate of return; that is, .
• The required rate of return must equal the realized rate of return; that is, .
• all companies must pay dividends.
• no companies can be in danger of declaring bankruptcy.

Question 16: Which of the following statements about defined contribution plans is incorrect?

• A defined contribution plan places the risk of poor pension portfolio performance on the employee.
• In general, employees can choose the investment vehicle under a defined contribution plan. Thus, highly risk-averse employees can choose low-risk investments, while more risk-tolerant employees can choose high-risk investments.
• In a defined contribution plan, the employer must make larger-than-average contributions to the pension plan when investment returns have been below expectations.
• Defined benefit plans are used more often by large corporations than by small companies.
• The PBGC insures a portion of pension benefits.

Question 17: The major contribution of the Miller model is that it demonstrates that

• personal taxes increase the value of using corporate debt.
• personal taxes decrease the value of using corporate debt.
• financial distress and agency costs reduce the value of using corporate debt.
• equity costs increase with financial leverage.
• debt costs increase with financial leverage.

Question 18: Which of the following statements about pension plan portfolio performance is incorrect?

• Pension fund sponsors must evaluate the performance of their portfolio managers periodically as a basis for future asset allocations.
• Alpha analysis, which relies on the Capital Asset Pricing Model, considers the risk of the portfolio when measuring performance.
• Peer comparison examines the relative performance of portfolio managers with similar investment objectives.
• A portfolio annual return of 12 percent from one investment advisor is not necessarily better than a return of 10 percent from another advisor.
• In managing the retiree portfolio, fund managers often use immunization techniques such as alpha analysis to eliminate, or at least significantly reduce, the risk associated with changing interest rates.

Question 19: A swap is a method used to reduce financial risk. Which of the following statements about swaps, if any, is NOT CORRECT?

• A swap involves the exchange of cash payment obligations.
• The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, say dollars and pounds.
• Swaps are very often arranged by a financial intermediary, who may or may not take the position of one of the counterparties.
• A problem with swaps is that no standardized contracts exist, which has prevented the development of a secondary market.
• A company can swap fixed interest payments for floating interest payments.

Question 20: Which one of the following aspects of banks is considered most relevant to businesses when choosing a bank?

• Convenience of location.
• Competitive cost of services provided.
• Size of the bank's deposits.
• Experience of personnel.
• Loyalty and willingness to assume lending risks.

Question 21: Which one of the following is an example of a "flexibility" option?

• A company has an option to invest in a project today or to wait a year.
• A company has an option to close down an operation if it turns out to be unprofitable.
• A company agrees to pay more to build a plant in order to be able to change the plant's inputs and/or outputs at a later date if conditions change.
• A company invests in a project today to gain knowledge that may enable it to expand into different markets at a later date.
• A company invests in a jet aircraft so that its CEO, who must travel frequently, can arrive for distant meetings feeling less tired than if he had to fly commercial.

Question 22: Which of the following statements about project risk analysis in not-for-profit firms is incorrect?

• The market risk of a project is not relevant to not-for-profit firms.
• A project's corporate beta measures the contribution of the project to the overall corporate risk of the firm.
• A project's corporate beta is found (at least conceptually) by regressing returns on the project against returns on the market portfolio.
• A project's corporate beta is defined as (σP/σF)rPF, where σP
• is the standard deviation of the project's returns, σF
• is the standard deviation of the firm's returns, and rPF is the correlation among the two sets of returns.
• In practice, it is usually difficult, if not impossible, to directly measure a project's corporate risk, so project risk analysis typically focuses on stand-alone risk.

Question 23: Which of the following statements concerning the MM extension with growth is NOT

• The tax shields should be discounted at the unlevered cost of equity.
• The value of a growing tax shield is greater than the value of a constant tax shield.
• For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions.
• For a given D/S, the WACC is less than the WACC under MM's original (with tax) assumptions.
• The total value of the firm increases with the amount of debt.

Question 24: A firm's credit policy consists of which of the following items?

• Credit period, cash discounts, credit standards, receivables monitoring.
• Credit period, cash discounts, credit standards, collection policy.
• Credit period, cash discounts, receivables monitoring, collection policy.
• Cash discounts, credit standards, receivables monitoring, collection policy.
• Credit period, receivables monitoring, credit standards, collection policy.

Question 25: Which of the following is true of the EOQ model? Note that the optimal order quantity, Q, will be called EOQ.

• If the fixed per order cost increases by 20%, then EOQ will increase by 20%
• If the annual sales, in units, increases by 20%, then EOQ will increase by 20%.
• If the average inventory increases by 20%, then the total carrying costs will increase by 20%.
• If the average inventory increases by 20% the total order costs will increase by 20%.
• The EOC is the same for all comppanies.

Question 26: Which of the following statements concerning the MM extension with growth is NOT CORRECT?

• The tax shields should be discounted at the unlevered cost of equity.
• The value of a growing tax shield is greater than the value of a constant tax shield.
• For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions.
• For a given D/S, the WACC is greater than the WACC under MM's original (with tax) assumptions.
• The total value of the firm is independent of the amount of debt it uses.

Question 27: Which of the following statements is CORRECT?

• Tests have shown that the betas of individual stocks are unstable over time, but that the betas of large portfolios are reasonably stable over time.
• Richard Roll has argued that it is possible to test the CAPM to see if it is correct.
• Tests have shown that the risk/return relationship appears to be linear, but the slope of the relationship is greater than that predicted by the CAPM.
• Tests have shown that the betas of individual stocks are stable over time, but that the betas of large portfolios are much less stable.
• The most widely cited study of the validity of the CAPM is one performed by Modigliani and Miller.

Question 28: Which of the following is NOT a potential problem with beta and its estimation?

• Sometimes a security or project does not have a past history which can be used as a basis for calculating beta.
• Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different than the "true" or "expected future" beta.
• The beta of "the market," can change over time, sometimes drastically.
• Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.
• There is a wide confidence interval around a typical stock's estimated beta.

Question 29: Which of the following are NOT ways risk management can be used to increase the value of a firm?

• Risk management can increase debt capacity.
• Risk management can help a firm maintain its optimal capital budget.
• Risk management can reduce the expected costs of financial distress.
• Risk management can help firms minimize taxes.
• Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.

Question 30: Which of the following is not correct?

• Collection policy is how a firm goes about collecting past-due accounts.
• A more aggressive collection policy will reduce bad debt expenses, but may also decrease sales.
• Collection policy usually has little impact on sales since collecting past-due accounts occurs only after the customer has already purchased.
• Typically a firm will turn over an account to a collection agency only after it has tried several times on its own to collect the account.
• A lax collection policy will frequently lead to an increase in accounts receivable.

Question 31: The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%. Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%.
What is the firm's cost of equity?

• 21.0%
• 23.3%
• 25.9%
• 28.8%
• 32.0%

Question 32: Calculate the required rate of return for Mercury, Inc., assuming that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) Mercury has a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years.

• 10.29%
• 10.83%
• 11.40%
• 12.00%
• 12.60%

Question 33: XYZ Company needs to borrow $200,000 from its bank. The bank has offered the company a 12-month installment loan (monthly payments) with 9 percent add-on interest. What is the effective annual rate (EAR) of this loan?

• 16.22%
• 17.97%
• 17.48%
• 18.67%
• 18.00%

Question 34: Picard Orchards requires a $100,000 annual loan in order to pay laborers to tend and harvest its fruit crop. Picard borrows on a discount interest basis at a nominal annual rate of 11 percent. If Picard must actually receive $100,000 net proceeds to finance its crop, then what must be the face value of the note?

• $111,000
• $100,000
• $112,360
• $ 89,000
• $108,840

Question 35: Oklahoma Instruments (OI) is considering a project called F-200 that has an up-front cost of $250,000. The project's subsequent cash flows are critically dependent on whether another of its products, F-100, becomes an industry standard. There is a 50% chance that the F-100 will become the industry standard, in which case the F-200's expected cash flows will be $110,000 at the end of each of the next 5 years. There is a 50% chance that the F-100 will not become the industry standard, in which case the F-200's expected cash flows will be $25,000 at the end of each of the next 5 years. Assume that the cost of capital is 12%.

Based on the above information, what is the F-200's expected net present value?

• -$6,678
• -$3,251
• $15,303
• $20,004
• $45,965